Merck KGAA could use some of the €3.4bn ($4.2bn) it will receive from the all-cash sale of its global consumer health business to strengthen its remaining business sectors, in healthcare, life sciences and performance materials, but the primary use of net proceeds from the sale of the consumer health business to Procter & Gamble Co., announced on Apr. 19, will be to speed up the deleveraging process, the German multinational said.
Stefan Oschmann, CEO of Merck KGaA
Merck had net financial debt of €10.1bn at the end of fiscal 2017, mainly due to the acquisition of Sigma-Aldrich Fine Chemicals. "We are resolutely working to quickly lower our acquisition-related debt-to-equity ratio," said CEO Stefan Oschmann when the company's year-end results were reported in March 2018. The sale is expected to close by the end of the fourth quarter 2018, subject to regulatory approvals and other conditions.
Although Merck said the sale would allow it to "increase flexibility to strengthen all three business sectors," the possibility of further deals in the near future was thought unlikely by Bernstein analysts. "We expect all €3bn in post-tax benefit to be used to de-lever rapidly to get below 2-times net debt/EBITDA by the end of 2018," they commented. Analysts at Morgan Stanley also believed the divestment would be positive for the company.
The pharma-related consumer health sector has undergone notable change over the past few years:last month,GlaxoSmithKline PLCspent $13bn on buying Novartis AG's 36.5% stake in the companies' consumer healthcare joint venture, enabling GSK to gain clarity about how much it could invest on pharma R&D and business development. (Also see "GSK Gains Clarity For Pharma Focus Through Novartis Consumer JV Buy" - Scrip, 27 Mar, 2018.)
At the beginning of 2017, Sanofi acquired the consumer products brands of Boehringer Ingelheim GMBH, in exchange for its Merial animal health care business. (Also see "Deal Watch: Sanofi Begins 2017 By Ending Vaccine JV, Completing Swap With Boehringer" - Scrip, 3 Jan, 2017.)
And Procter & Gamble was previously thought to be in the running to acquire the consumer health business from another pharmaceutical company, Pfizer Inc..
The consumer health divestment will allow Merck to concentrate on its strategy of becoming a global specialty company, buoyed by recent launches of the multiple sclerosis therapy, Mavenclad (cladribine), and the checkpoint inhibitor co-developed with Pfizer, Bavencio(avelumab). Merck said the consumer health business had been sold at an attractive price, reflecting the high asset value and performance.
As part of the deal, around 3,300 employees will move over to Procter & Gamble, subject to employee consultations. Key products in Merck's consumer health business include the combination vitamin B product, Neurobion, and the nasal decongestant, Nasivin(oxymetazoline), which are global brands, and the vitamin D product, Vigantol, which is primarily marketed in Europe.
Procter & Gamble said the purchase would "improve its OTC geographic scale, brand portfolio and category footprint in the vast majority of the world's top 15 OTC markets." The acquisition will replace the PGT Healthcare joint venture P&G had with Teva Pharmaceutical Industries Ltd., that is ending on July 1, 2018, pending regulatory approval; the two companies said their priorities were no longer aligned.
Despite sales growing above the average for the consumer health sector, at 6% rather than around 4%, over the past few years, the consumer health business of Merck accounted for only a small part, 6%, of its overall activities – in 2017, net sales of the consumer health business amounted to €911m, a 7.6% increase, while total sales at Merck reached €15.3bn.