* Bayer to become OTC drug market's second biggest operator
* Merck expects after-tax proceeds of between $8-$9 bln
* Largest German healthcare deal since Schering takeover
* Bayer sells some rights to lung drug for up to $2.1 bln
(Adds details on industry ranking, shares, comment by analyst)
By Ludwig Burger
FRANKFURT, May 6 Germany's Bayer AG
has trumped rival bidders for Merck & Co Inc's consumer
care business in a $14.2 billion deal, adding to a string of
major cross-border deals in the healthcare industry.
"This acquisition marks a major milestone on our path
towards global leadership in the attractive non-prescription
medicines business," Bayer's chief executive, Marijn Dekkers,
said in a statement on Tuesday.
Merck, which is selling non-prescription brands such as the
MiraLAX laxative and Afrin cold remedy, said it expects
after-tax proceeds of between $8 billion and $9 billion from the
sale, which is expected to close in the second half of
The transaction, the largest in the German healthcare
industry since Bayer bought rival Schering for 17 billion euros
($24 billion) in 2006, will make Bayer the world's
second-biggest consumer healthcare company, as it seeks to make
better use of its distribution network and sales force.
"We can take these products and market them more forcefully
than Merck has been able to do so far," Dekkers said in a
conference call with analysts.
Bayer, the inventor of aspirin and maker of Bepanthen skin
care products and Canesten antifungal creams, has repeatedly
said it wants to take the top spot in the rankings.
Drug makers have embarked on a major reshuffling of their
business portfolios. Novartis and GlaxoSmithKline
(GSK) last month agreed to trade more than $20 billion
worth of assets, while AstraZeneca is fighting off a
$106 billion takeover approach from Pfizer.
Meanwhile companies including France's Sanofi,
Merck & Co and Abbott are looking at selling off mature
drugs that have lost patent protection.
OTC drugs units carry far lower margins than prescription
drugs businesses but many drug majors regard them as attractive
complements due to the stable stream of cash they can generate.
They akso require less spending on research and development
and can be less exposed to the loss of patent protection where
consumers remain loyal to a brand even when cheap copies become
But Reckitt Benckiser Group, one of the final
contenders in Merck's auction, said on April 30 it was no longer
in active talks to buy the Merck business, leaving Bayer in pole
Bayer also edged out other rival bidders, including Procter
& Gamble Co, Boehringer Ingelheim, Novartis and Sanofi ,
people familiar with the matter have said.
J&J commands about 4 percent of the consumer health
market - worth nearly $200 billion at the retail level.
Merck & Co has around 1 percent with brands including Dr
Scholl foot care, Coppertone sunscreen and Claritin allergy
The fragmented OTC industry is consolidating fast. Novartis
and GSK will form a joint venture in consumer healthcare as part
of their agreement last month.
That deal is set to elevate the combined group, with $9.5
billion in sales, to the top of the global consumer health
ranking, overtaking Johnson & Johnson and Bayer.
But Bayer said the Merck deal will put it back on the second
rung, with $7.4 billion in combined sales.
J&J's consumer unit has $14.7 billion but market observers
exclude many of its products, such as Listerine mouth wash, from
their analysis of the OTC market.
With Bayer paying 6.5 times 2013 revenue and 21 times
earnings before interest, taxes, depreciation and amortisation
(EBITDA), analysts at Deutsche Bank said the price tag may seem
"eye-watering" at first sight.
"The deal works both strategically and financially, and
creates value (albeit to a modest degree)," the analysts said,
adding it reduces volatility in the Bayer business and provides
a predictable cash flow.
Bayer's enlarged consumer care unit will account for about
13 percent of group sales, up from 10 percent now.
Bayer's shares closed 0.9 percent lower at 99.07 euros,
while the STOXX Europe 600 health care index slipped 0.4
Reuters first reported last month that Bayer and Reckitt had
emerged as frontrunners in the auction with each initially
offering roughly $13.5 billion.
In addition, Bayer agreed to sell to Merck some rights to
its Adempas drug against high blood pressure in the lung and
other experimental cardiovascular drugs, saying it needed a
As part of that alliance, Merck will pay up to $2.1 billion,
including $1.1 billion in milestone payments contingent on
Bayer said it plans to finance the OTC acquisition with a
bridge loan facility provided by Bank of America Merrill Lynch
, BNP Paribas and Mizuho, which will
be syndicated to a larger group of banks.
It added no asset sales were needed to preserve its credit
rating of "A-".
(Additional reporting by Esha Dey in Bangalore; Editing by
Sriraj Kalluvila and Greg Mahlich)