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German Merck eyes $5.3 bln generic drugs sale-source
Thu Jan 4, 2007 7:45am ET17

FRANKFURT, Jan 4 (Reuters) - Merck KGaA plans a quick sale of its generic drugs business estimated to be worth about 4 billion euros ($5.3 billion), a source familiar with the matter said on Thursday, as the German drugs and chemicals group cuts debt piled up from its $13.3 billion Serono buy.

"Merck is interested in initiating the sale quickly," said a source familiar with the matter, adding that a 4 billion euro price tag was possible based on recent deals.

The move to sell follows Merck's recent takeover of Swiss biotech firm Serono, which it is financing mainly by borrowing, after failing to buy rival Schering last year.

German newspaper Handelsblatt reported on Thursday Merck's supervisory board had already given the go-ahead for the company to look for a buyer as it cuts debt.

Shares in Merck rose 4.9 percent to 84.71 euros at 1122 GMT compared with a 0.7 percent dip in the German mid-cap <.MDAXI> index and a 0.5 percent gain in the DJ healthcare index <.SXDP>.  

"From a strategic point of view, given the area Merck is involved in terms of their generics, it's probably not going to be of strategic interest to a pharma company, so I think it would be a financial buyer if they were to sell it," said a London trader.

However, the trader said the price looked "punchy."


The Handelsblatt newspaper said financial investors were the most likely buyers of Merck's business in generic drugs.

"An actual sale process hasn't started yet," an investment banker told Reuters, adding there could be strong interest from industry rivals.

Merck's key business is liquid crystals, which are used in flat-screen televisions and mobile-phone displays.

But Merck, the world's oldest pharmaceuticals-chemicals conglomerate, founded more than 300 years ago, also has extensive generics operations which made sales of about 1.8 billion euros in 2005, close to one-third of the company's total sales, and about the same as its operating profit.

Generic drugs are biologically equivalent to but usually cheaper than brand-name drugs. They can be legally produced as imitations of brand-name drugs whose patent has expired, or where no legal patent exists.

Isabella Zinck, analyst at HVB, said in a research note that Merck's generics business could fetch 3.7 billion to 7.3 billion euros based on recent transactions that priced similar businesses at between two and four times sales.

Zinck said operating margin at Merck's generics business was around 11 percent which was in line with the industry's average but lower than the group's margins across all of its businesses of an estimated 16.5 percent.

Europe's fast-growing generic pharmaceuticals industry is widely expected to consolidate further over the next few years, as companies seek to position themselves better in the high-risk business, amid tough competition.

Swiss drugmaker Novartis bought generics company Hexal for $8 billion in 2005. More recently, Barr Pharmaceuticals Inc. said it would buy Croatian drugmaker Pliva for $2.5 billion last October.

Merck, one of the few remaining chemical-drug hybrids, is the world's fourth-biggest generics drugmaker, behind Israel's Teva, Novartis's Sandoz and Barr.

Merck's shares have a price-to-earnings multiple of 18 times this year's forecast earnings, making them costlier than German rival Bayer, which trades at 15.7 times, according to Reuters estimates.

Source: Reuters

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