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Merck Becomes Latest Pharma to Consider Breakup

Stocks in this article: MRK PFE ABT

NEW YORK (The Deal) -- Pharmaceutical giant Merck (MRK) is taking a page out of its rivals' playbooks and is considering a breakup.

The Whitehouse Station, N.J.-based company said Monday it would consider separating its animal health and consumer businesses, either through a spinoff, outright sale or other option.

The move follows similar ones made by rivals Pfizer (PFE) and Abbott Laboratories (ABT). The split of three Pfizer units went effective Jan. 1 after the New York pharma giant last year spun off its animal health division, Zoetis, into a separately traded company. Abbott Park, Ill.-based Abbott Labs (ABT) in January 2013 completed a spinoff of its research-based pharmaceutical business AbbVie (ABBV) to rid itself of a more capital-intensive business.

Merck first suggested a separation into three segments -- pharmaceuticals, animal health and consumer products -- in November. After two months of internal debate, the company has decided to consider breaking ties with the animal health and consumer businesses but not the pharma operations.

Merck's over-the-counter consumer business, which includes Coppertone sunblock and Claritin allergy medication, had sales of $1.95 billion in 2012. Meanwhile, Merck's animal health division, which produces pharmaceutical and vaccine products for all major farm and companion animals, reported sales of $3.4 billion in 2012.

While the separation of these assets would make Merck a leaner, more focused operation and could also help offset a 2013 where Merck missed sales targets every quarter, Mark Schoenebaum of New York-based ISI Group said any breakup is just one of a number of potential growth drivers for Merck in 2014.

"Despite investor beliefs to the contrary, [Merck] has a reasonable list of potential catalysts this year," he wrote in a note Monday.

Most important is the fate of Merck's MK-3475, an antibody being developed to treat advanced melanoma and lung cancer. MK-3475 would put Merck into competition with Bristol-Meyers Squibb's (BMY) melanoma drug Yervoy.

Merck said Monday it had initiated an application with the Food and Drug Administration to start testing MK-3475.

BMS is expected to announce preliminary data for Yervoy in September and, "if the data are not definitive, [Merck] could be the natural beneficiary since the very large lung cancer market would suddenly open up," Schoenebaum wrote.

Separately, Merck also announced Monday other deals it has made. It completed the sale of U.S. marketing rights for Saphris, a treatment for schizophrenia and bipolar disorders, to Forest Laboratories (FRX) for as much as $240 million. Merck also said it had sold its RNAi-focused subsidiary, Sirna Therapeutics, to Cambridge, Mass.-based Alnylam Pharmaceuticals (ALNY) for up to $265 million. Merck paid $1.1 billion for Sirna in 2006. (On Monday, France's Sanofi expanded a drug collaboration with Alnylam, taking a 12% stake for about $700 million.)

Despite the significant drop in asking price for Sirna, investors were encouraged by Merck's announcements. The 122-year-old company's shares were up $2.81 per share, or 5.6%, to $52.69 during midday trading Monday. Merck closed Friday at $49.88 per share.

Merck spokeswoman Kelley Dougherty said all options remain on the table for the units.

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