Bayer seals $14bn deal for Merck brands

By Andrew Ward in London, Ed Hammond in New York and Jeevan Vasagar in Berlin

Germany’s Bayer has agreed to buy Merck’s consumer healthcare business for $14.2bn, acquiring brands including Coppertone sunscreen lotion and Claritin anti-allergy pills in the latest deal to reshape the global pharmaceuticals sector.

The deal will make Bayer the second-biggest over-the-counter drugs maker, behind Johnson & Johnson of the US and ahead of GlaxoSmithKline of the UK. It is Bayer’s second-largest acquisition after buying Schering for $17bn in 2006.

GSK last month also moved to strengthen its position in the sector by agreeing to acquire the consumer healthcare division of Novartis of Switzerland as part of a $20bn asset swap.

Bayer and GSK both see consumer healthcare as a growth area ripe for consolidation as demand for products ranging from toothpaste to cold remedies increases in developed and emerging markets.

Marijn Dekkers, Bayer chief executive, said it had paid a “significant” price, but said the deal fitted into the context of others in the sector in recent years.

Bayer is paying 21 times last year’s earnings, in a deal clinched after the UK’s Reckitt Benckiser, previously seen as the frontrunner, dropped out of the bidding last week.

However, Fabian Wenner, head of healthcare sector research at Kepler Cheuvreux, said that the deal’s internal rate of return would not cover Bayer’s weighted average cost of capital.

“The OTC business is strategically sound long term but they clearly overpaid, as Reckitt went out of the race,” Mr Wenner said. “This is always a strong indication that for sure you overpaid, as Reckitt has been willing in the past to pay strong multiples.”

The acquisition represents a significant bet on the US, where Merck’s consumer healthcare division generates about 70 per cent of its revenue.

Bayer expects to generate about $200m in annual savings by 2017 through merging its consumer healthcare business with that of Merck.

As with rivals such as Pfizer, Merck is facing up to the loss of patents on key drugs and the need to deliver new medicines. (FT)