By Peter Loftus
Drug maker Merck & Co. agreed to sell its over-the-counter
medicine and consumer-product business to Bayer AG for $14.2
billion in cash, as Merck narrows its focus to prescription drugs
and vaccines while Bayer bulks up its OTC unit.
The companies also formed a collaboration to co-develop and
market certain prescription heart drugs, including Bayer's Adempas,
a treatment for a form of high blood pressure. Merck will pay Bayer
$1 billion upfront, plus potential additional milestone payments of
up to $1.2 billion if sales goals are reached.
The deal will add nonprescription Merck products such as the
Claritin allergy medicine and Coppertone sunscreen to Bayer's
namesake aspirin and Aleve pain reliever, joining businesses that
had combined sales of $7.4 billion in 2013.
The deal continues a recent surge in health-care industry
mergers-and-acquisition activity that is reorganizing the market
for OTC medicines and many other businesses. Last month, Novartis
AG and GlaxoSmithKline PLC announced a deal to merge their OTC and
consumer-products businesses into an operation with about $10
billion in yearly sales from such products as Excedrin pain
medicine and Aquafresh toothpaste.
Merck said in January it was exploring options for its OTC
business because it didn't have a strong presence outside North
America. To gain global scale, Merck needed to either make hefty
acquisitions outside North America or sell to another company with
a stronger market share overseas, Merck Chief Executive Kenneth
Frazier said in an interview Tuesday before a meeting with analysts
and investors at a Merck research site in Boston.
"We're very strong in the U.S. Bayer is very strong outside the
U.S.," Mr. Frazier said. "The brands we both have are
complementary. We wanted a home for this business that was the
right home for these brands. And we got a very good price for the
business."
Merck, based in Whitehouse Station, N.J., received interest from
several pharmaceutical and nonpharmaceutical companies, which
helped drive up the price, Mr. Frazier said. Last week,
consumer-goods company Reckitt Benckiser Group PLC said it was in
talks with Merck for a potential deal, but subsequently said those
talks had ended without a deal.
According to two people familiar with the matter, Bayer also
outbid privately held rival Boehringer Ingelheim GmbH for the Merck
assets.
Merck is slimming down after bulking up with its 2009
acquisition of Schering-Plough, which brought in the consumer
business. The business had $1.9 billion in sales last year, down 3%
from the year before, constituting about 4% of Merck's total
revenue.
Merck had also said in January it was exploring options for its
division that makes drugs and vaccines for pets and livestock,
which had $3.4 billion in sales last year. But the company has
decided to keep its animal-health unit, Mr. Frazier said Tuesday,
because it already has a strong global presence and a leading
market position, in contrast to the consumer business.
"We should be looking for opportunities to augment our already
leading animal-health franchise," he said.
The Merck-Bayer deal will help Bayer expand its market share in
the U.S. and give it an entry into the market for foot-care
products such as shoe inserts, via Merck's Dr. Scholl's brand.
"We are adding significant scope and earnings power to a
business that is already delivering strong margins and stable cash
flows," said Bayer Chairman Marijn Dekkers.
The purchase is Bayer's second-biggest after buying Schering AG
for $17 billion in 2006.
Merck has been slashing costs, including layoffs of thousands of
employees, and narrowing its focus mainly to the parts of its
prescription-drug business and research pipeline it sees as the
most promising. These include an experimental cancer drug, MK-3475,
which harnesses the body's immune system, and which analysts say
has multibillion-dollar sales potential if it reaches the
market.
Merck said Tuesday it completed an application for U.S. Food and
Drug Administration approval of MK-3475 for the treatment of the
skin-cancer melanoma, and expects an agency decision by late
October.
Merck said it would use the $8 billion to $9 billion in
after-tax proceeds from the Bayer deal to fund the development of
MK-3475, to license or acquire other drugs, and to return capital
to shareholders.
Michael Calia, Neetha Mahadevan and Jonathan D. Rockoff
contributed to this article.
Write to Peter Loftus at peter.loftus@wsj.com
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