True, that’s peanuts compared to the $100 billion Pfizer (PFE) is offering for AstraZeneca (AZN), and just a fraction of the $46 billion Valeant (VRX) offered for Allergan (AGN). Holders of Merck stock probably know the deal between MRK and Bayer even pales compared to the $25 billion acquisition of Forest Labs (FRX) by Actavis (ACT).
But the reasons for these deals are all broadly the same. Companies like Merck and Pfizer are hurting from loss of exclusivity on blockbusters drugs. As Pfizer showed Monday, revenue is in a steep decline from a number of hit drugs going generic.
MRK is suffering from the same fate — blockbusters going generic — and that reality will eventually catch up to Merck stock unless it can deliver or buy new blockbusters pronto. By selling the consumer business for a fat multiple, MRK believes it can use the cash to do just that.
With brands including Claritin, Coppertone, Dr. Scholl’s and Tinactin, the MRK consumer business is considered to be a crown jewel in the industry. That’s why Bayer wants it.
Bayer, for its part, maintains its place as the world’s No. 2 seller of over-the-counter medicines. It’s just behind Johnson & Johnson (JNJ) — for now. Once GlaxoSmithKline (GSK) and Novartis (NVS) close their asset swap, that joint venture will be No. 1 in OTC. JNJ will fall to third place.
The MRK consumer business has only 1% of global market share, but the market is so large and fragmented it’s still a coveted asset. JNJ’s OTC business, with 4% market share, generates $200 billion in retail sales. No wonder everyone from JNJ to Novartis to Procter & Gamble (PG) reportedly bid at auction for the MRK OTC unit.
But what does this do for Merck shareholders? Well, if nothing else, they’ll get MRK stock buybacks and maybe a dividend hike.
MRK Stock Holders Need to Stay Frosty
Be forewarned that anyone holding Merck stock needs to be patient while waiting to see what MRK does with the $8 billion to $9 billion it expects to net from the sale. The idea is to build up the higher-margin prescription drug business, but funding research and development and finding targets to buy could take some time.
True, Merck shareholders can take some comfort in the fact that MRK is focusing on creating or buying new blockbuster drugs. That’s where the big money is made. And Merck stock is by no means having a bad year. It’s up 5% for the year-to-date. But if Merck hopes to put up outsized gains over the long haul, it needs a steady stream of hit meds like Zetia and Januvia.
In the meantime, MRK said it will return more cash to shareholders. Buybacks and dividends should help mollify impatient shareholders, but what MRK really needs are new blockbusters.
MRK sold a crown jewel to double down on that strategy. For the sake of holders of Merck stock, it had better work.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.