Merck KGaA to resist lure of potential proceeds from OTC sale

Tue Nov 27, 2012 7:32am EST

* Merck: 'All governing panels agree' OTC arm not for sale

* Commitment comes after takeover tussle over rival Schiff

* Merck OTC, owner of Seven Seas brand, seen as too small

By Ludwig Burger

FRANKFURT, Nov 27 (Reuters) - Merck KGaA said it would keep its non-prescription drugs unit even as a tussle over vitamin maker Schiff Nutrition highlighted the rich sale premium it could fetch.

Merck's Consumer Health unit, home to Seven Seas vitamins and Bion probiotics brands, is seen by industry experts as too small, sitting between Merck's much larger businesses selling prescription drugs, high-tech chemicals and lab equipment.

While Merck's top executives may want to consider a sale, which would help the company with the costs of replenishing its thin pharmaceuticals development pipeline, the founding family that controls the group is attached to the division.

"Consumer Health is not for sale. Instead, we are currently improving the unit's profitability. All governing panels at Merck are in agreement over this," the company said in a written statement to Reuters.

Reckitt Benckiser and Bayer's bidding for U.S. nutritional supplements maker Schiff showed that both drug majors and household product companies are keen to snap up over-the-counter (OTC) drug assets that come onto the market.

Reckitt will pay about 3.6 times Schiff's revenue, above deal multiples of 2-3 times common in the industry.

Pharmaceutical companies like OTC brands for their stable income streams, albeit at low margins, which counterbalance prescription drugs. The non-prescription industry is expected to grow by 5 percent annually through 2021, according to market researcher Nicholas Hall & Co.

Household goods makers, in turn, see OTC assets as welcome supplements in their fight over drugstore shelf space.

With about 500 million euros in sales, Merck's OTC arm is a small player in a more than 80 billion euro ($100 billion) overall market, where No.1 Johnson & Johnson commands $4.4 billion in sales and runners-up Bayer and GlaxoSmithKline also have multi-billion dollar businesses.

Sources familiar with the company say the division is held dear by the 150-member strong Merck clan - descendants of the 17th-century founder - because it is the only business left that carries the company brand directly to the general public.

Family-owned companies are often more diversified and free to ignore the logic that drives peers under free float ownership. Merck's privately held German peer Merz, the maker of the most commonly used Alzheimer's drug memantine, for instance, also makes ball pens.

Merck KGaA also said it was not looking for alliances or takeover targets to add the scale to its OTC arm that some industry experts say it is lacking.

The European Union demands evidence of any health claim made for dietary supplements, often requiring costly trials. The bigger a supplier's market footprint, the better its chance of recouping such costs.

There have been signs that Merck's top executives do not share the family's attachment to the division. Chief Executive Karl-Ludwig Kley told the Financial Times early last year he may put the unit up for sale, but backtracked a few months later.

A person close to one prospective buyer said that about a year earlier, management unofficially gauged interest for Consumer Health at about three times annual sales, in what bankers interpreted as a move to dangle possible proceeds in front of the Merck family.

"There is no lack of interest in the business and management knows it," one investment banker familiar with the healthcare sector said, speaking on condition of anonymity.

Judging by sales multiples of recent deals, Merck could fetch more than 1.5 billion euros if it did sell the division. (Additional reporting by Arno Schuetze and Frank Siebelt; Editing by Helen Massy-Beresford)