LONDON, Jan 7 (Reuters) - Germany's Merck KGaA MRCG.DE could unlock substantial value by selling its consumer health business to a larger company, with France's Sanofi-Aventis SASY.PA an obvious buyer, according to a leading analyst.
UBS analyst Gbola Amusa values the over-the-counter (OTC) drugs unit at 2.1 billion euros ($2.8 billion), or 4.5 times sales, reflecting fierce competition for assets in a defensive sector with steady cash flows and no patent expiry worries.
“We think it reasonable for Merck to sell the business, and Sanofi-Aventis would be a logical buyer,” he said.
Other established players like GlaxoSmithKline GSK.L should not be ruled out, but Amusa said the Merck business, whose products include the Seven Seas brand of supplements, made most sense as a target for Sanofi.
The French group is widely expected to embark on a strategy of acquisitions to diversify operations under new Chief Executive Chris Viehbacher, who took over last month.
It recently bought Symbion to expand its OTC presence in Australia and has a 1,150 crowns per share bid outstanding for Czech generics manufacturer Zentiva.
The $100 billion-a-year global OTC healthcare market has seen a wave of consolidation recently, with big companies like Johnson & Johnson JNJ.N, Novartis NOVN.VX, Reckitt Benckiser RB.L and Glaxo all acquiring assets.
“There are tremendous economies of scale in the OTC world and Merck is hampered because it’s sub-efficient scale and so focused in Europe,” Amusa said.
“The families (that control Merck) have been holding on to it, likely because there is some stability in the cash flows of this business. But it’s worth more to other companies.”
Amusa and colleagues at UBS said in a research note the consumer health market should grow by an average 5 percent a year over 2007-12 -- twice as fast as the European prescription drug market, which faces loss of patent protection on many key products.
Merck spokesman Gangolf Schrimpf declined to comment specifically on the UBS report but reiterated previous statements from management that Merck planned to hold on to its four divisions and wanted to strengthen consumer healthcare.
UBS, however, noted that Merck made similar comments about retaining generic drugs before selling that business in 2007.
At Merck’s current 1.9 times 2009 revenue multiple, the Consumer Health Care business is worth less than 900 million euros, implying 1.2 billion euros upside from a sale, UBS said. That is equivalent to 5.54 euros a share or 9 percent on Merck’s current share price.
“Nearly 10 percent upside on one transaction is not bad,” Amusa told Reuters.
At 0827 GMT, Merck KGaA was trading virtually unchanged at 67 euros per share.
Additional reporting by Ludwig Burger in Frankfurt
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