Which Drugmaker Will Snap Up Merck’s Consumer Health Unit?

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Merck (NYSE:MRK), the second largest drugmaker in the United States after Pfizer (NYSE:PFE), is looking to narrow its focus and gain scale in the increasingly fragmented consumer and healthcare industry. The latest move the pharmaceutical company has made to stabilize its business amid years of patent expirations and struggles to develop new drugs is fielding offers for its consumer healthcare business, a division that contains Coppertone sunscreen, Dr. Scholl’s foot care, and Claritin allergy medicine. Sanofi (NYSE:SNY) — maker of the world’s top-selling diabetes treatment — has become the latest company to join the bidding, as Bloomberg reported Tuesday.

Sources familiar with the deal told the publication that the unit could be worth between $10 billion and $20 billion. As Barclays analysts wrote Tuesday, “over-the-counter assets like Merck’s consumer health unit are highly desirable for market incumbents as almost no additional infrastructure is required.”

The global consumer health industry is dominated by Johnson & Johnson (NYSE:JNJ), which holds an approximately 4 percent share of the market. Bayer (BAYRY.PK), GlaxoSmithKline (NYSE:GSK), Novartis (NYSE:NVS), Pfizer, and Sanofi each have a market share of more than 2 percent. Merck’s nearly 1 percent share of the market is very small by comparison.

Since both Johnson & Johnson and Sanofi have competing products, it was expected that neither of those companies would make an offer. However, Sanofi would benefit from the geographical distribution of the business’s profits, 70 percent of which come from the United States, as the Barclays analysts noted. Plus, the company — which generated 3 billion euros, or $4.14 billion, in revenue last year — has identified consumer health products as an essential growth vehicle as it attempts to lessen its reliance on blood thinners and insomnia treatments.

Sanofi shares closed at $52 on Tuesday, leaving the company with a market capitalization of $138.54 billion.

So far, Reckitt Benckiser Group (RBGLY.PK), which manufactures Clearasil acne treatment cream, has most aggressively pursued the consumer healthcare business, those individuals familiar with the details of the deal told Bloomberg. But Reuters learned last month that Procter & Gamble (NYSE:PG), Bayer, and Novartis are considering making offers as well.

For Germany-based Bayer, a company looking to expand its consumer products business, Merck’s products would complement its portfolio, which includes the pain medication Aleve and the antacid Alka-Seltzer. Bayer attempted to acquire Schiff Nutrition International in 2012 but lost a bidding war with Reckitt, which purchased the British consumer products group for $1.3 billion. Reckitt’s own consumer products business includes Mucinex and Nurofen, and as the company’s chief executive told Reuters last September, the healthcare company not only wants to be a major power in consumer health but has the financial firepower to make the deals necessary to accomplish that goal. With a range of healthcare products like Vicks cold and flu medicine and Prilosec heartburn medication, Procter & Gamble could also benefit from Merck’s business.

Novartis is preparing a more complicated proposition; Merck discussed a potential asset swap with the Switzerland based drugmaker in which Merck would receive its animal health and other units in return for the consumer products unit. The likelihood that such a deal could be completed is low because of the complexity of valuing the different business. Novartis is still interested in offering cash for the business if the asset swap cannot be made, noted Reuters in February.

In putting its consumer healthcare business on the auction block, Merck is pursuing a strategy to boost shareholder value that was pioneered by Pfizer. Facing a huge patent cliff, the drugmaker began spinning off non-core business; in 2012, its infant-nutrition business was sold to Nestle (NSRGY.PK) for $11.9 billion, while last year its animal health unit was split off into a separate publicly traded company, Zoetis (NYSE:ZTS). But by no means is Pfizer the only company divesting assets in order to allocate capital more diligently. Throughout the industry, pharmaceutical companies have begun to consider that certain of their assets may do better under new management. In recent years, a trend in the pharmaceutical industry has begun to form; drugmakers have been spinning off or selling business units that management deems too small or slow-growing so that a greater focus can be put on new drugs.

Merck’s consumer health business fits neatly in the category of assets that are growing too slowly. In fact, last years its sales fell 3 percent to $1.9 billion, accounting for a very small portion of the company’s total sales of $44 billion.

Of course, allocating capital more diligently will not solve all Merck’s problems. Compared to its rivals like Johnson & Johnson, Novartis, and GlaxoSmithKline, Merck has made fewer acquisitions deals than its competitors and kept more drug research and development in-house. That strategy has left the drugmaker with a weak new-product pipeline. The company’s research laboratories were once led the industry; it was there that the first measles vaccine was developed and the first marketed, cholesterol-lowering statin drug. The companies researchers were known for guiding the research process from discovery to the final stages of development. But the pharmaceutical manufacturer has not found a blockbuster drug since Januvia and cervical-cancer vaccine Gardasil were approved by the Food and Drug Administration in 2006.

Shares of Merck closed up 1.50 percent at $56.02 on Tuesday.

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