Out with the old, in with the new. The German drug and chemical conglomerate Merck KGaA says it is exploring the sale of its generic-drug business, one of the world's largest such operations. Merck's comments on Friday about divesting its generics unit as "one strategic option" portends more action in a field that has been filled in recent years with buyouts in the U.S. and overseas. The announcement coincided with Merck's reporting that it has now purchased most of the shares of the Swiss biotechnology company Serono ( SRA). Merck offered $13.3 billion in September for the company whose major product is the multiple sclerosis drug Rebif. All told, it now holds 84% of Serono's capital stock and 89% of the voting rights. Next week, Merck hopes to commence a tender offer for the remaining shares. The deal has been approved by U.S. and European Union regulators. If Merck sells its generics unit -- a decision first reported by a German newspaper on Thursday -- it could use the cash to help pay for Serono, even though it already has lined up a $15 billion loan package through several investment banking firms. "Merck Generics has a strong business with excellent leadership and good growth prospects for the future," said Michael Roemer, chairman of the company. "However, it will need continued investment to fully realize its potential and strengthen its market presence. In light of the far-reaching changes occurring in the market, we are considering as an option the divestiture of Merck Generics to a qualified buyer."
The company said it hadn't talked to any potential buyers, and it didn't put a price tag on the unit that sells products in more than 90 countries including the U.S. In 2005, the generics unit had sales of about $2.34 billion. Merck's generic-drug revenue trails the industry's giants, Israel's Teva Pharmaceutical Industries ( TEVA) and the Sandoz division of Switzerland's Novartis ( NVS). Based on pro forma sales data from two recent mergers, Merck's generic-drug revenue also is behind Watson Pharmaceuticals ( WPI), which acquired rival Andrx, and is close to Barr Pharmaceuticals ( BRL), which bought Croatia's Pliva. Given the Merck unit's size, it's doubtful that there would be many suitors. The usual suspects would be Teva and Novartis because of their bankrolls, but both are still digesting big acquisitions. Teva closed its $7.4 billion purchase of Ivax 12 months ago. Novartis spent $8.3 billion to buy two generic-drug firms in mid-2005 and another $5.4 billion in April to buy the shares of Chiron that it didn't own. Unless Merck tries a spinoff or a sale to a group of investors, it would need to find a company with deep pockets. One theoretical suitor would be France's Sanofi-Aventis ( SNY). Like Merck and Novartis, it is one of a few big companies that sells both prescription drugs and generic drugs. Sanofi-Aventis doesn't break out generics' sales, but its annual report says generics provide "growth in value," as well as a way to fill manufacturing capacity. Some big U.S. drugmakers sell some generics, but they focus on copies of their own brand-name products that have lost patent protection. Merck KGaA isn't connected to New Jersey's Merck ( MRK).