Bayer Lands Merck Consumer As Springboard to Lead Global OTC Industry

The $14.2 billion deal is “a major milestone on our path toward global leadership” in OTC sales, says Bayer Chairman Marijn Dekkers. The acquisition focuses on expanding international sales of Merck products including the Claritin allergy, Coppertone sunscreen and MiraLax constipation lines.

Bayer AG will become the second-largest OTC drug firm and have a springboard to reach No. 1 by paying $14.2 billion for Merck & Co. Inc.’s consumer business with “very powerful household names in North America” that Bayer plans to make popular worldwide, says Chairman Marijn Dekkers.

The agreement announced May 6 comes 14 months after Bayer announced its goal of being the top global OTC firm and shrinks the gap between the German firm and global consumer health care product leader Johnson & Johnson (Also see "Bayer Aims For Global OTC Lead With Bolt-On Acquisition Plans" - Pink Sheet, 4 Mar, 2013.).

“We can now deliver a major milestone on our path toward global leadership in this highly attractive and rapidly consolidating nonprescription medicine industry,” Dekkers said in a media briefing.

He added that the acquisition focuses on expanding international sales of Merck products including the Claritin (loratadine) allergy, MiraLax (polyethylene glycol) constipation and Coppertone sunscreen product lines.

“Where the upside really works for us is taking the very, very strong brands … that are so well known in the U.S. and taking them out of the U.S. aggressively.”

Merck CEO Kenneth Frazier described the deal as a step in the Whitehouse, N.J.-based firm’s portfolio realignment. “We’re able to further our goal of being the premier research-intensive biopharmaceutical company through targeted investments that strengthen our product portfolio and enhance our pipeline,” Frazier said in a release.

Bayer expects the acquisition to add 2% to core earnings per share in the first year after closing, which the firm expects in the second half of 2014 subject to approval from the relevant antitrust and other regulatory authorities.

The firms’ agreement ends speculation on a buyer for Merck’s consumer business, while also ending Merck’s foray into the OTC and dietary supplement markets that started in 2009 with its acquisition of Schering-Plough Corp.

Reckitt Benckiser Group PLC was bidding for Merck’s consumer business until the U.K. consumer, personal and household care firm announced May 4 that it no longer was in talks with Merck, which has considered divesting its consumer since not long after closing the Schering-Plough deal (Also see "“Likely” Merck Consumer Health Sale Could Bring $8 Billion – Analysts" - Pink Sheet, 4 Dec, 2013.).

In a related same-day transaction, Bayer and Merck agreed to a collaboration focused on soluble guanylate cyclase modulation, a cardiovascular disease treatment. Merck will make an up-front payment of $1 billion and sales milestone payments of up to $1.1 billion related to future collective sales of collaboration compounds (Also see "Bayer/Merck Cardio Rx Collaboration Pumped Up By Consumer Deal" - Pink Sheet, 6 May, 2014.).

Multiplying Markets

Bayer’s and Merck’s consumer businesses combined accounted for $7.6 billion (€5.5 billion) in 2013 sales, a “strong No. 2 OTC company on a global basis,” Dekkers said.

While Bayer points out Merck’s iconic brands, the key driver in the firm’s plan to overtake J&J for the top OTC spot is expanding marketing for Merck’s products.

“Given the focus of Merck’s sales organization on North America, the product portfolio has significant upside potential for an international rollout through Bayer’s substantial global commercial footprint,” Dekkers said.

Moreover, Bayer’s marketing footprint is a key driver for revenue synergies from the deal, which the firm expects to reach $400 million by 2017.

Dekkers said revenue synergies will “come in particular from our ability to take the Merck products that have been specifically marketed in the U.S. to other regions in the world and drive significant growth of those products there.”

Meanwhile, in North America – “the most important market” – Bayer will double its sales and move from No. 3 to the leading OTC firm, Dekkers said.

According to Bayer, its 2013 North American consumer product sales were $1.6 billion and Merck’s were $1.5 billion.

Bayer has the same expectations for its consumer business ranking in Europe, where its 2013 sales reached $2.2 billion while Merck’s were $236 million.

Dekkers said that as a “strong No. 2” in European OTC sales, Bayer is “an organization that already manages 10 times the sales in Europe of Merck products.”

The firm also expects to drive sales growth by expanding Merck’s brands to Asian and Latin American markets.

Bayer Chairman Marijn Dekkers says acquiring Merck & Co.'s consumer business marks "a major milestone on our path toward global leadership in this highly attractive and rapidly consolidating nonprescription medicine industry.”

Dekkers pointed out the firm’s calculations on its OTC sales ranking took into consideration GlaxoSmithKline PLC’s and Novartis AG’s recent announcement of a consumer product joint venture, but does not include potential effects from Bayer’s acquisition of Dihon Pharmaceutical Group Co. Ltd. in China.

Bayer announced in February it acquired Dihon, which markets national brands including Pi KangWang cream for athlete’s foot and Kang Wang shampoo for dandruff and other scalp disorders and traditional Chinese medicine products led by Dan E Fu Kang series of creams for women’s health. The deal doubles the size of Bayer’s consumer product business in China, where the firm acquired Topsun Science & Technology Co. Ltd. in 2006 (Also see "Dihon Acquisition Doubles Bayer’s Consumer Health Presence In China" - Pink Sheet, 3 Mar, 2014.).

Glaxo and Novartis in April agreed to combine their consumer portfolios in a JV that the firms say could become the global leader for OTC drugs and that provides much-needed help for each firm’s consumer products business (Also see "Glaxo And Novartis Scratch Each Other’s Back With Consumer Product JV" - Pink Sheet, 23 Apr, 2014.).

“Blockbuster” Brands

Bayer expects its consumer business will be well-armed for growth with the popularity of Merck’s brands, particularly Dr. Scholl’s foot care products and the Claritin, Coppertone and MiraLax lines.

“In an industry in which a product [with] $100 million sales is defined as a blockbuster, Merck’s consumer care business has four category-leading blockbusters,” Dekkers said.

According to Bayer’s media-briefing materials, OTC Claritin sales in 2013 were $799.2 million, Dr. Scholl’s $322 million, Coppertone were $287.2 million and MiraLAX were $195.6 million.

“Merck’s various product brands will immediately strengthen Bayer’s portfolio both by significantly enhancing our presence at the point of sale and also by contributing strongly to profit,” the chairman said.

The firm asserts the combined consumer businesses will be the global leader in the dermatology category with $2.1 billion in annual sales and the gastrointestinal category with $804.7 million; No. 2 in cold, allergy, sinus and flu – $1.6 billion – and nutritionals, $1.4 billion; and No. 3 in analgesics, $1.2 billion.

“The business that we are requiring is really a perfect fit to us,” Dekkers said.

Bayer’s consumer health brands include the analgesics Aspirin, which had sales of $643.8 million in 2013, and Aleve, with $445.4 million; skin care lines Bepathen – $430 million – and Canesten, $356.6 million; cough/cold and gastrointestinal line Alka-Seltzer, $297 million; and the vitamin lines One-A-Day – $244.2 million – and Supradyn, $211 million. The firm does not market Bepanthen, Canesten and Supradyn products in the U.S.

“Beauty” In Financing

Bayer said it anticipates one-time costs, primarily in 2014 and 2015, of approximately $500 million related to executing the transaction and combining the businesses.

Bayer plans to finance the acquisition with a bridge loan, provided by Bank of America, Merrill Lynch, BNP Paribas and Mizuho, that it will syndicate to a larger group of banks. The firm says it plans the capital market take-out of the loan for a later date with a combination of senior and hybrid capital instruments.

“The good news ... is that we can completely finance it with debt. We are able to afford this without any further requirements to raise capital in any other way. I think this is the beauty of this deal for us,” Dekkers said.

With the acquisition treated primarily as an asset purchase, Bayer expects “significant tax savings from the first year after closing,” according to its presentation materials.

The firm also expects integration of the two businesses to generate cost synergies, such as in marketing spending and cost of goods, of around $200 million annually by 2017.

Dekkers also noted staff reductions in both firms’ consumer products businesses will not be significant.

“This is a not a deal that hinges on job eliminations as a key value driver. The key value driver here is the revenue synergies that we can accomplish, particularly outside the U.S., where we plan to utilize the existing Bayer sales presence … to also complementary sell the Merck products,” he said.

Merck said selling its consumer unit will net between $8 billion and $9 billion, which it will use to “to resource those areas within its business that represent the highest potential growth opportunities … to augment the company’s pipeline with external assets that can create value.”