Merck & Co. Inc. could gain $8 billion from the “likely” sale of its consumer health business, according to J.P. Morgan market analysts.

Merck’s largely U.S.-centric consumer health business with OTC brands including Claritin allergy drugs and the Coppertone sunscreen line could have global appeal, “particularly in the hands of a company that would be better equipped to leverage these brands globally,” said JPM analyst Christopher Schott in a Dec. 2 research note.

The JPM note recapping a recent discussion with CEO Kenneth Frazier and other executives points to a shift in the Whitehouse Station, N.J-based firm’s thinking about its consumer and animal health product businesses. Divesting the consumer and animal product properties could unlock more than $5 billion in shareholder value under Merck’s current valuation, Schott said.

“The meeting highlighted a markedly more focused business approach at Merck, including the potential divestiture of non-core assets both in its pharma and non-pharma businesses,” wrote Schott, adding that the consumer products business “appears to be a likely divestiture in our view and could command a high multiple.”

Merck recently sold three branded sterile eye drop solutions to Akorn Inc. for $52.8 million, and Schott said other non-core Rx assets also will “likely be shed as part of this process.”

Merck’s largely U.S.-centric consumer health business could have global appeal, “particularly in the hands of a company that would be better equipped to leverage these brands globally.” – Christopher Schott, J.P. Morgan

“While we would expect relatively modest accretion from these potential transactions, we believe they would be well-received by shareholders as part of a more focused strategy within Merck,” the analyst said.

JMP believes the division could be more valuable in an outright sale, if it commands a high sales multiple, than in a spin-off. Schott pointed to a modelinthe sale ofPfizer Inc.’s consumer product business to Johnson & Johnson in 2006 for more than four times its annual sales.

JPM “would expect Merck’s business could also command a high multiple,” Schott noted. Applying a multiple of four times to Merck’s business would translate roughly to an $8 billion sale price.

Frazier said during the firm’s fiscal 2013 third-quarter earnings call in October that Merck would evaluate all of its businesses to determine whether the firm would benefit from selling any ([A#05131104009]).

Merck did not single out its consumer business at that time, and earlier in October the firm had reaffirmed its commitment to the units in an announcement of a cost-cutting initiative meant to help drive growth in the pharmaceutical division, which has floundered somewhat in recent years Also see "Merck Reaffirms Commitment To Consumer Care In Restructuring" - Pink Sheet, 2 October, 2013..

However, the company is experiencing increased pressure on its drug pipeline after several high-profile failures, noted Morningstar analyst Damien Conover. He pointed to Merck’s “stagnant” drug sales and a need to create investor interest until compounds like anti-PD-1, an investigational cancer drug, reach later stages in development ([A#14131028003]).

Morningstar values Merck’s consumer health unit at approximately $4 billion, with consumer health care product sales of $443 million in the third quarter.

An Attractive Target

Other analysts differ in their predictions for whether Merck will divest the business and whether a sale or spin-off would be better, but they agree that most other firms with a presence in consumer health could be interested in picking up the division.

Conover noted in an interview that Bayer AG could be an especially good fit since it has a strong consumer health unit that would allow for easy integration of Merck’s business and has been looking for acquisitions.

Conover said a spin-off of the unit would make more sense for Merck if the firm intends only to return cash to shareholders through a share repurchase program because the firm could avoid tax implications typically attached to an outright sale.

Merck’s sale of its consumer business would be a “short-term Band-Aid” that would signal new Rx products “will not be forthcoming to sufficiently support earnings growth.” – Tony Butler, Barclays

Spinning off some or all of its non-core assets would be similar to Bristol-Myers Squibb Co.’s launch of Mead Johnson Nutrition Co. as a separate firm in 2008 Also see "BMS Spins Off Mead Johnson In IPO, Retaining Majority Control" - Pink Sheet, 28 April, 2008..

Not all analysts see the sale of the consumer or animal product business as good for Merck. They note that the firm relies on revenues from its U.S.-based businesses to fund dividend payments because bringing cash back from overseas has a high tax burden.

Barclays analyst Tony Butler pointed out in an Oct. 28 note that selling the consumer business would be a “short-term Band-Aid” that would signal new Rx products “will not be forthcoming to sufficiently support earnings growth.”

Butler added that Merck would “cater to Wall Street desires” if it divests the consumer and/or animal product businesses. Proceeds from the sale of either or both could go toward reducing the number of shares for the purpose of supporting earnings per share, he said.

Merck is not the only pharma firm that has analysts speculating. Sanford Bernstein analysts published a research note Oct. 8 stating that Novartis AG CEO Joe Jimenez clarified the firm is considering divesting its consumer health products business, which includes OTCs and medicines for livestock and companion animals, and its vaccines and diagnostics business Also see "Novartis Seems Close to Consumer Health Sale – Analyst" - Pink Sheet, 10 October, 2013..

Pfizer, which returned to the consumer product market in its 2009 merger with Wyeth, also is the subject of speculation about leaving the consumer space. The firm already sold its Capsugel drug formulation and delivery business to private equity firm Kohlberg Kravis Roberts & Co. in 2011, followed shortly after with the sale of its nutritionals business to Nestle SA in 2012, and spun out its animal health unit in 2013 Also see "Nestle Pays Nearly $12 Bil. For Desirable Pfizer Nutrition Portfolio" - Pink Sheet, 30 April, 2012..

Merck added the bulk of its consumer health business in its 2009 merger with Schering-Plough Corp., and shortly after appointed former J&J executive Bridgette Heller to steer the division in global expansion Also see "Merck Appoints Consumer Head To Help Division Expand Globally" - Pink Sheet, 22 February, 2010..

“Likely” Merck Consumer Health Sale Could Bring $8 Billion – Analysts

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