A Fracturing Industry Is Forcing Merck to Make Touch Choices

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Merck (NYSE:MRK), the second-largest drugmaker in the United States after Pfizer (NYSE:PFE), is looking to narrow its focus and gain scale in the increasingly fragmented consumer and healthcare industry. The latest move the pharmaceutical company has made to stabilize its business amid years of patent expirations and struggles to develop new drugs is fielding offers for its consumer healthcare business, a division that contains Coppertone sunscreen, Dr. Scholl’s foot care, and Claritin allergy medicine. Through individuals familiar with the company’s thinking, Reuters learned that Reckitt Benckiser Group (RBGPY.PK), Procter & Gamble (NYSE:PG), Bayer (BAYRY.PK), and Novartis (NYSE:NVS) are considering making an offer. The process is private, the sources said, but the consumer healthcare products could be worth between $10 billion and $12 billion.

The global consumer health industry is dominated by Johnson & Johnson (NYSE:JNJ), which holds an approximate 4 percent share of the market. But Bayer, GlaxoSmithKline (NYSE:GSK), Novartis, Pfizer, and Sanofi (NYSE:SNY) each have a market share of more than 2 percent. Merck’s market share of about 1 percent share is very small by comparison.

Both Johnson & Johnson and Sanofi have competing products so it is highly unlikely those companies would make an offer. But for Germany-based Bayer, a company looking to expand its consumer products business, Merck’s products would complement its portfolio, which includes the pain medication Aleve and the antacid Alka-Seltzer. Bayer attempted to buy Schiff Nutrition International in 2012, but lost a bidding war with Reckitt, which purchased the British consumer products group for $1.3 billion. Reckitt’s own consumer products business includes Mucinex and Nurofen, and as the company’s chief executive told Reuters last September, the healthcare company not only wants to be a major power in consumer health but has the financial firepower to make the deals necessary to accomplish that goal.

With a range of healthcare products, like Vicks cold and flu medicine and Prilosec heartburn medication, Procter & Gamble could also benefit from Merck’s business. GlaxoSmithKline currently has a low appetite for making acquisitions and will likely not pursue a deal with Merck.

Novartis is preparing a more complicated proposition; Merck discussed a potential asset swap with the Switzerland-based drugmaker in which Merck would receive its animal health and other units in return for the consumer products unit. The likelihood that such a deal could be completed is low because of the complexity of valuing the different business. Novartis is still interested in offering cash for the business if the asset swap cannot be made.

Preliminary offers for the consumer health business — which will be sold in its entirety, not in parts — were made a few weeks ago, while second-round offers are expected to be made in May, Reuters learned.

In putting its consumer healthcare business on the auction block, Merck is pursuing a strategy to boost shareholder value that was charted by Pfizer. Facing a huge patent cliff, the drugmaker began spinning off non-core business; in 2012, its infant-nutrition business was sold to Nestle (NSRGY.PK) for $11.9 billion, while last year its animal health unit was split off into a separate publicly traded company, Zoetis (NYSE:ZTS). But by no means is Pfizer the only company divesting assets in order to allocate capital more diligently. Throughout the industry, pharmaceutical companies have begun to consider that certain of their assets may do better under new management.

Of course, allocating capital more diligently will not solve all Merck’s problems. Compared to its rivals like Johnson & Johnson, Novartis, and GlaxoSmithKline, Merck has made fewer acquisitions deals than its competitors and kept more drug research and development in-house. That strategy has left Merck with a weak new product pipeline. Merck’s research laboratories were once led the industry; it was there that the first measles vaccine was developed as well as the first marketed, cholesterol-lowering statin drug. The company’s researchers were known for guiding the research process from discovery to the final stages of development. But the pharmaceutical manufacturer has not found a blockbuster drug since Januvia and cervical-cancer vaccine Gardasil were approved by the Food and Drug Administration in 2006.

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