Germany’s Merck puts consumer drugs business up for sale; does this signal a last-ditch shot at M&A or just shoring up existing pipeline?

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The News:

Merck KGaA (Darmstadt DEU) put its consumer-health unit on the block Tuesday (September 5, 2017) in a move that will focus its healthcare activities on the riskier business of developing prescription medicines, the company said. A final decision hasn’t been made.

The move is a bet on Merck’s growing pipeline of prescription drugs for diseases like cancer and multiple sclerosis. Merck has struggled to launch lucrative new drugs in recent years, though it has confidence in its current development pipeline, forecasting new drugs could generate more than EUR2 billion ($2.38 billion) in yearly revenue by 2022, according to MorningStar.

“We have continued to transform Merck…over the last years into a leading science and technology company,” CEO Stefan Oschmann said in a statement.

Merck’s consumer-health unit manufactures over-the-counter drugs and generated sales of EUR 860 million in 2016 from a portfolio of 10 core brands that serve more than 40 markets. Citi analyst Peter Verdult estimated it could fetch a price of EUR 1.8 billion to EUR 2.7 billion from a full sale.

Drugmakers face pressure to scale up consumer-health businesses amid a wave of consolidation in the segment. In 2015, GlaxoSmithKline PLC (London) and Novartis AG (Basel CHE) combined their consumer-health businesses into a Glaxo-controlled joint venture. France’s Sanofi SA gobbled up Germany’s Boehringer Ingelheim GmbH’s consumer-health unit last year.

Belén Garijo, who heads GR-Merck’s healthcare business, said in the statement that the company lacked the financial firepower to build its growing consumer health unit to the “required scale.”

For companies like Glaxo and Sanofi, reliable revenues from big consumer-health businesses help smooth out the more unpredictable sales of prescription drugs, which succeed or fail on the outcomes of costly and risky clinical trials and whose sales drop sharply after patent expiration.

A sale of the consumer-health unit would focus Merck’s healthcare arm purely on prescription meds. Earlier this year, Merck sold its biosimilars business–which developed generic versions of biologically made drugs–to Fresenius SE (Bad Homburg) in a deal worth up to EUR670 million.

“We view this as a sensible capital-allocation decision, reflecting both increasing confidence in the pharma pipeline and prioritization of investment elsewhere across group,” said Citi’s Verdult in a note to clients.

Merck said proceeds from any transaction would be used to help meet its financial targets. Merck shares were trading up 4% on the week at 95.60 euro Wednesday (September 6, 2017) afternoon in Frankfurt.

The company isn’t affiliated with US-based Merck & Co. (Kenilworth NJ).

Steve’s Take:

Now here’s a company that traces its roots back to a 17th century pharmacy. That’s a very long time ago, pre-dating the entire history of the US of America. So, after decades of sitting back and quietly watching other big pharmas make strategic investments in cutting edge new and potentially hugely profitable therapies, it appears swapping its consumer business for a pile of cash can only be the precursor to a much bigger move.

Steve's Take: Is @EMDGroup consumer business sale a precursor to a much bigger move? Click To Tweet

Perhaps even in the direction of acquiring a medicine befitting this new wave of “transformative” treatments. By cutting edge I mean the CAR-T therapies like Novartis’s recently approved, potential blockbuster, Kymriah and US Merck’s dazzling checkpoint inhibitor, Keytruda.

The GR-Merck’s management in the recent past has even informally sounded out prospective buyers, only to be thwarted by the founding family that owns 70% of Merck and favored a diversified strategy for the vintage drugmaker.

Merck now is focusing on its pharmaceuticals unit, where it is pinning growth hopes on cancer immunotherapy treatment Bavencio and multiple sclerosis pill Mavenclad after a string of setbacks. It has also built a global biotech laboratory supplies business with takeovers of Millipore and Sigma-Aldrich in 2010 and 2016.

Merck saw liquid crystals revenue surge at the turn of the century with the advent of flat-screen LCD TVs, having failed for decades to find a commercial use for the substance. But Chinese rivals have been chipping away at its dominant market position, leading it to spend billions on takeovers to counterbalance its dependence on the high-tech screen chemicals that still account for about 15% of group earnings.

Bottom Line:

It’s the right move, says Max Nisen for Bloomberg. The company is already playing an expensive brand of catch-up in one of the hottest cancer-drug markets out there and in pharma generally. It can’t afford to play the same game with its relatively tiny consumer health business. Raising cash and beginning to de-conglomerate is the way to go, Nisen adds.

If anything, Merck has arrived late to the realization that its consumer business might not be able to stand alone. Substantial investment would be required to make Merck’s unit more relevant–and the company has other priorities.

News of Merck’s potential sale of its consumer unit comes on the heels of its first major FDA drug approval in about a decade, for the immune-boosting cancer medicine Bavencio. A sale could raise $3 billion, which, along with increased focus, could help make sure that drug succeeds.

As its rivals have spent billions buying up other drug companies, Merck has thrown its M&A budget at its non-pharma business, most recently with the $17 billion acquisition of Sigma-Aldrich in 2015. The company’s $14 billion in debt means it still has some deleveraging to do and some analysts say it is unlikely to use M&A for more pharma growth. The more cash and attention it can devote to its pharma unit, the better, they believe.

Better late than never, is all I can think GR- Merck’s board and management must be thinking. The question is, are they too late to join the M&A binge we’ve observed recently. Who remains a worthwhile target to buy that can boast sales prospects like the wonder drugs Kymriah and Keytruda–that won’t bankrupt the company due to a way-too-rich acquisition price?

Tough situation to be in, but that’s where GR-Merck’s management has been trying to guide the company for quite some time and only now is getting the nod from the family shareholders to make the right moves. Only time will tell if the window has closed on these wonder-drug M&A deals.

Just last week, for example, Gilead Pharma (Foster City CA) shelled out $12 billion for Kite Pharma (Santa Monica CA) and its chimeric antigen receptor T-cell (CAR-T) therapy Axi-cel, currently under priority review by the US Food & Drug Administration.

But at least Merck is trying to stay in the game.  It’s one of the relatively few pharma conglomerates left, combining branded drugs with chemicals and over-the-counter products.

A sale won’t turn Merck into a top-tier pharma player overnight. If they don’t succeed, looking for a buyer and disappearing from the pharma landscape forever will at least end the constant confusion of the public about which Merck they are. Frankly, though, I hope they continue to cause such confusion–at least until the end of this century.

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