By Peter Loftus
Merck & Co. is getting out of the business of making
Claritin allergy medicines and Coppertone sunscreens, selling off
its over-the-counter business to Bayer AG for $14.2 billion.
Tuesday's deal is just the latest in a wave of mergers and
acquisitions that is reshaping the global pharmaceutical industry.
Many drug companies are narrowing their focus, dropping out of
noncore businesses and bulking up where they have the size and
expertise to generate significant sales growth.
Pfizer Inc. is offering more than $106 billion to get
AstraZeneca PLC's promising cancer medicines--though Astra has
rejected the bid. Eli Lilly & Co. is doubling down on animal
drugs and vaccines, while Novartis AG is paying up to $16 billion
for GlaxoSmithKline PLC's cancer medicines.
The deals would leave fewer competitors with larger revenue
streams in each segment of the drug business, from prescription
medicines and vaccines to drugs for livestock and pets.
The narrowing of focus carries some risks, leaving companies
more vulnerable to setbacks in their remaining businesses, analysts
and industry officials say.
"Companies are being told by their shareholders to focus on what
they are historically the best at," said Mark Schoenebaum, a
pharmaceutical industry analyst with ISI Group. "That varies from
company to company. So companies are buying their strengths and
selling their weaknesses."
The recent merger activity includes two large unsolicited
overtures: Pfizer's bid for AstraZeneca and Valeant Pharmaceutical
Industries Ltd.'s nearly $46 billion offer for Allergan Inc., the
maker of Botox.
Bayer's agreement to buy Merck's consumer-product business adds
to a stable of such brands, including Bayer's namesake aspirin and
the Aleve pain reliever. Merck and Bayer's combined nonprescription
businesses had total sales of $7.4 billion in 2013.
Bayer, based in Leverkusen, Germany, expects the Merck deal to
make it the No. 2 over-the-counter drug company by global sales,
Bayer Chief Executive Marijn Dekkers said Tuesday. Ranking No. 1
will be the OTC businesses of Novartis and GlaxoSmithKline, which
the companies plan to combine into a joint venture with $10 billion
in yearly sales from such products as Excedrin pain medicine and
Aquafresh toothpaste.
The biggest OTC companies are consolidating to help them compete
more effectively for shelf space in large retail pharmacy chains
such as Walgreen Co., Dr. Dekkers said.
Merck, based in Whitehouse Station, N.J., has a strong presence
in U.S. retailers but not as much market share overseas. "We now
have an opportunity to take the Merck product brands and make them
more global," Dr. Dekkers said.
That opportunity is stronger in emerging-market countries such
as China and Brazil than it is in developed European markets that
already have established brands, Dr. Dekkers said. The deal will
also 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.
The acquisition is Bayer's second-biggest ever, after its $17
billion purchase of Germany's Schering AG in 2006.
Merck and Bayer also agreed to form 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.
Merck is slimming down after bulking up with its 2009
acquisition of Schering-Plough Corp. of the U.S., which brought in
the OTC and consumer products business. That unit had $1.9 billion
in sales last year, down 3% from the year before, constituting
about 4% of Merck's total revenue.
Merck said in January it was exploring options for the OTC
business because it didn't have a strong presence outside North
America. To gain global scale, Merck would have needed to make
hefty acquisitions, Merck Chief Executive Kenneth Frazier said
Tuesday.
Merck 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 Merck 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.
Merck is 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 analysts say has multibillion-dollar sales potential if it
reaches the market. Merck has submitted the drug to the U.S. Food
and Drug Administration and expects a decision by late October, the
company said Tuesday.
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. Merck shares fell 2.6% on Tuesday, while Bayer
slipped 1%.
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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