Why Merck's Bayer Deal Makes Sense

Merck got a great price for its consumer health business and continues to push its oncology platform forward.

May 8, 2014 at 6:30PM

Pharma giant Merck (NYSE:MRK) has been a little more active than normal lately, with most of its activities pointing toward better value creation for its shareholders. In addition to strong phase 2 hepatitis C data that vaults the company back into serious competition, Merck was the first to file for approval for its PD-1 drug, putting it in the lead to be first-to-market with this next generation of oncology immunotherapies.

Merck also recently reported earnings, updated investors on its R&D and strategic priorities, and finalized the sale of its consumer health business to Bayer (NASDAQOTH:BAYRY). All of this activated hasn't radically changed the company's earnings prospects, though it does free up significant capital that can be returned to shareholders or invested back into the business.

Bayer pays up for a rare asset
Most sell-side analysts had expected Merck to sell its consumer health business for something on the order of $9 billion to $10 billion. As it turns out, Bayer was willing to pay substantially more than that – agreeing to buy one of the largest consumer health franchises for $14.2 billion in cash. Bayer is paying around 6.5 times sales and 21 times EBITDA, a steep premium to the average of similar large transactions (4.8x / 17.4x).

Bayer was likely willing to pay so much because deals of this size and scale are seldom possible. Bayer badly wants to have the biggest consumer health business, but even after this deal that still won't be the case – assuming that the Glaxo-Novartis combination goes through, that will be the largest consumer health business with about 5.7% share, while this deal will make Bayer second with around 4.5% share. Johnson & Johnson will fall to #3 with just over 4% share.

Bayer gets a business that generates around $2 billion in revenue and boasts strong brands like Claritin and Dr. Scholl's. Importantly, Merck will maintain switch rights for its existing drug portfolio, including Singulair (though an FDA panel recently voted 11-4 against an OTC version of Singulair).

I find it a little interesting that this deal was done for cash. Merck has expressed interest in growing its animal health business and taking Bayer's animal health business back would have accomplished that goal (and likely in a more tax-efficient way). That said, it takes two to deal and Bayer likely didn't want to part with the animal health business, likely forcing it to offer more cash.

An R&D angle as well
This wasn't the only transaction between Bayer and Merck. The two companies also announced that Merck is buying into a collaboration on sGC modulators (a class of cardiology drugs). Merck is paying $1 billion for a 50/50 collaboration on Bayer's sGC drug Adempas for pulmonary aterial hypertension and will market the drug outside of the Americas. The companies will also co-develop vericiguat (BAY102) for heart failure and other potential sGC drugs in the future.

This deal should help improve Merck's cardiology business and gives it potential exposure to under-treated cardiology indications like heart failure.

A mostly positive R&D update
Merck's analyst day had some notable tidbits for investors. The company pushed hard to get its filing for MK-3475 (its PD-1 drug) into the FDA and the company has a PDUFA date of October 28 for the Yervoy-refractory melanoma indication. This isn't a large market, but it gives Merck a good shot at being first-to-market with a PD-1/PD-L1 drug, beating Bristol-Myers to the punch.

Merck also announced that its anti-GITR drug (MK-4166) was entering clinical trials. Anti-GITR drugs stimulate the immune system to attack cancer. All things considered, Merck is still behind Bristol-Myers in immuno-oncology and has had to turn to partnerships for more than Bristol-Myers to augment its early stage pipeline.

Merck also mentioned a "smart insulin" in pre-clinical development. This insulin formulation is apparently inactive at low blood glucose levels, a development which should significantly reduce the risk of hypoglycemia. It's going to be a long road for this product, but it's an interesting idea.

The bottom line
Merck has been quite strong this year, logging a 15% gain thus far and leading rivals like Glaxo, Pfizer, and Bristol-Myers by a pretty significant amount. Optimism regarding the company's hepatitis C and oncology platforms has no doubt helped, as has anticipation of a strong price for the consumer health business. Merck doesn't look tremendously expensive at this level, though I would be a little nervous about sell-side analysts turning more negative on relative value calls in the space. That's admittedly a very short-term concern.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers