German HealthCare giant
) entered into a definitive agreement with
Merck & Co. Inc.
) 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
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
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
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
Bayer already has well known over-the-counter (OTC) 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
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
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
Johnson & Johnson
). Both Allergan and Johnson & Johnson carry a Zacks Rank #2
ALLERGAN INC (AGN): Free Stock Analysis
BAYER A G -ADR (BAYRY): Free Stock Analysis
JOHNSON & JOHNS (JNJ): Free Stock Analysis
MERCK & CO INC (MRK): Free Stock Analysis
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