Bayer broadens healthcare line by keeping Merck's consumer brands

(Corrects fourth paragraph to read "portfolio acquired from Merck", not "portfolio acquired by Merck")

German drugmaker Bayer said it would keep the Dr. Scholl's and Coppertone brands it bagged as part of a $14 billion buy from U.S. Merck, despite overtures from companies keen to grab them, widening its healthcare line to include consumer goods.

Just weeks after clinching the deal to buy Merck 's non-prescription drugs business, Bayer - best known as a life sciences company which makes cancer drugs - is being courted by rivals keen to acquire the foot care and sunscreen brands, several people with knowledge of the approaches told Reuters.

But when asked about the expressions of interest for Dr. Scholl's and Coppertone - each worth more than $1 billion - Bayer said it was not planning to untie the Merck bundle it secured in May in a competitive bidding tussle with Reckitt Benckiser, Procter & Gamble Co and Novartis .

"We intend to keep the portfolio acquired from Merck & Co. as a core business," Bayer said in a written statement.

The German company, which makes contraceptives as well as prescription drugs against cancer, heart disease and multiple sclerosis, said when it bought the Merck business that its aim was to become global leader in over-the-counter (OTC) medicines.

The deal was the largest in the German healthcare sector since Bayer bought rival Schering for 17 billion euros ($24 billion) in 2006.

But with Bayer's existing OTC medicines business listing products like aspirin and Canesten antifungal creams, some are questioning the logic of it wanting to keep everyday products like sunscreen.

"They aren't really part of the core business and don't have much to do with medicines in the strict sense," said Warburg Research analyst Ulrich Huwald.

Offloading Dr. Scholl's foot care and Coppertone, which account for 27 percent of the Merck bundle's combined annual sales, would allow Bayer to focus on Merck's core healthcare products such as allergy remedy Claritin and MiraLAX laxative, analysts say, and give it the resources to make the most of those brands.

Repeated comments by chief executive Marijn Dekkers in the past that Bayer - the inventor of aspirin - is mainly about life sciences and molecular research, seem to have given hope to consumer goods companies that he might yet have wanted to part with brands that have little to do with healthcare.

Reckitt Benckiser, which owns the Scholl foot care brand outside the United States, as well as Beiersdorf and L'Oreal were seen as potential acquirers. Officials at the three companies declined to comment.

GOING FOR SHELF SPACE?

There are however sound reasons for Bayer to retain Coppertone and Dr. Scholl's despite the products being so different to much of its other business: Big U.S. drug store chains such as Walgreen Co and CVS Caremark prefer dealing with suppliers that can fill large amounts of shelf space and the two big consumer brands would add to Bayer's bargaining power.

Bayer has also said that the Merck deal, which is expected to close in the second half of the year, should allow it to make better use of its distribution network and sales force and give it more clout when dealing with retailers.

There may however be another reason Bayer is reluctant to sell. Having bought Merck's unit for more than twice the core earnings multiple at which Johnson & Johnson, the world's largest consumer care company, is trading, any spin-off sales might reveal it to have overpaid.

One source said Coppertone and Dr. Scholl's, with $275 million and $309 million in 2013 sales, respectively, could be worth as much as $4 billion between them, reflecting the sales multiple of about 6.5 that Bayer paid for the entire Merck consumer bundle.

But another person said that Dr. Scholl's was more likely to fetch $1 billion to $1.5 billion, and Coppertone about $1 billion, because personal care products change hands for lower multiples than the medicines included in last month's deal.

Selling on some consumer brands for a lower earnings multiple than what was agreed for the entire Merck portfolio would exposed the high price paid for the remaining OTC drugs - and might not go down well with Bayer investors.

"Shareholders would start to do the maths," the source said. (Additional reporting by Anjuli Davis and Ben Hirschler in London; Editing by Sophie Walker)