UPDATE 1-Novartis and Merck discuss earnings-boosting asset swap

Thu Jan 9, 2014 9:20am EST

* Novartis may swap animal health, vaccines for Merck's OTC

* Analysts see exchange boosting earnings for both firms

* Swap preferred but trade sale also possible -bankers

* Novartis, Merck may each trade $5 bln in assets -Bloomberg

By Sophie Sassard and Arno Schuetze

LONDON/FRANKFURT, Jan 9 (Reuters) - Novartis AG is discussing swapping its animal health and human vaccines businesses for Merck & Co Inc's over-the-counter products unit in a deal that could boost earnings at both companies.

Healthcare bankers said an asset swap with Merck was the main focus for the Swiss drugmaker as it reviews its portfolio, although an outright sale of animal health or an exchange with other companies were still possible.

One of the bankers said Novartis and Merck had been in talks for some time but asset swaps were hard to execute, due to the difficulty of comparing the relative attraction of different businesses.

If the hoped-for swap with Merck does not work out, Novartis is likely to opt for a sale or swap with another leading animal health firm, such as Bayer, Zoetis, Sanofi , Eli Lilly or unlisted Boehringer Ingelheim.

Bloomberg reported earlier that Novartis and Merck might each trade about $5 billion in assets under an eventual deal.

Sources with knowledge of the matter had told Reuters last month that Novartis was ready to sell its animal health unit and had opened its books to Bayer and others for the business that could change hands for more than 3 billion euros ($4.1 billion).

New chairman Joerg Reinhardt is casting a fresh eye over the Basel-based group following the departure of veteran chairman and one-time CEO Daniel Vasella, the architect of the merger of Ciba-Geigy and Sandoz that created Novartis in 1996.

Reinhardt has defended the firm's diversified strategy, but has stressed Novartis will only hang on to businesses that are among world leaders. That has left uncertain the future of sub-scale operations like animal health and vaccines.

PORTFOLIO FIT

Novartis already agreed to sell its blood transfusion testing unit to Spain's Grifols for $1.7 billion in November.

Merck, meanwhile, has been saying for some time that its over-the-counter (OTC) consumer health business lacks scale and Bernstein analyst Tim Anderson said a swap could boost earnings per share at both companies by around 3 percent.

Merck's OTC line-up would add products such as Claritin medicine for allergies, Coppertone sunblock and Dr Scholl's foot care, boosting Novartis's already strong consumer care portfolio.

Analysts said Merck's products would fit well within the Novartis OTC business, since it is currently dominated by remedies for coughs, colds and pain.

The Novartis animal health products include Sentinel and Prac-tic flea and tick treatments for dogs, as well as a range of other products for pets and farm animals, while its human vaccines operation mainly makes flu shots.

Many drugmakers are currently shedding businesses, prompted by pricing pressures and increasing competition from generics that has forced a more rigorous approach to capital allocation. As part of that they are also showing a new willingness to consider whether other companies may be better owners for certain assets, thereby unlocking value for shareholders.

Pfizer, for example, has already spun out its animal health operations into Zoetis and sold its infant nutrition business to Nestle.

A Novartis spokeswoman told Reuters that the company does not comment on market rumour or speculation.

Merck was not immediately available for comment outside regular U.S. business hours.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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