Mylan Would Find Merck KGaA Consumer Unit a Deal Too Far

(Bloomberg Gadfly) -- Less than two years after making its biggest-ever acquisition, Mylan NV is in talks with Merck KGaA about buying the company's consumer business, according to Reuters.

There's something to be said for opportunism -- several other bidders have dropped out of the running for this unit over the past few months, and the price may have dropped. But Mylan needs to dial back its deal ambitions. 

Though Mylan later called the Reuters report "untrue," the deal isn't out of strategic left field. Mylan's $9.97 billion acquisition of Meda in 2016 was an effort to diversify by adding a broader geographic presence and more exposure to over-the-counter products. Buying Merck KGaA's consumer business would further that effort when the firm's core generic business is under pressure. But it's more questionable from a financial standpoint.

Merck's consumer business wouldn't require an enormous outlay by drug deal standards. Reuters is reporting a possible price tag of $4.3 billion to $4.9 billion. But that still might be too much for Mylan. 

Mylan had $14.7 billion in debt at the end of 2017 and $368 million in cash. Merck wants cash to develop or acquire novel drugs, so it's unlikely to be especially interested in a transaction with a large equity component. Mylan is on the very edge of investment grade just when raising debt is likely to become more expensive. A deal of this size could impact its credit rating at risk. Expected Ebitda expansion and further debt paydown should begin to shrink the firm's leverage ratio to a more comfortable level in the next few years, and this transaction would prematurely derail that effort.

Mylan's focus on complex generics insulates it to a certain degree from the pricing pressure that is eating into revenue and profitability across its industry. But it is by no means immune to that pressure, and other companies are following a similar strategy as prices decline in big sections of the market. If the generics environment worsens or the firm's pipeline under-delivers, the company's projection that adjusted Ebitda will grow by $200 million to $700 million could prove too optimistic. The company's share price dipped on Tuesday after it talked down expectations for the first quarter slightly during its investor day. While the risks the company faces make diversifying the business extra appealing, it also makes a bigger debt load extra nerve-wracking. 

And it's not as if the deal is risk-free. Merck's consumer business is heavily focused on vitamins, and it will be a struggle to maintain pricing power in that market over the long run, a dynamic that Mylan is already overly familiar with. 

Absent a pretty huge price cut, this deal is too-much too-soon for Mylan. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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