Merck Millipore to Buy Sigma-Aldrich

Merck KGaA became the latest company to enlarge its stake in the laboratory-products market with its announcement on September 22 of an agreement to purchase Sigma-Aldrich for approximately €13.1 billion ($17 billion = €0.77 = $1) in cash (see page 2). Together, the firms will create a €4.7 billion ($6.1 billion) supplier of laboratory and pharmaceutical-manufacturing products and services. Previously, Merck had significantly expanded its laboratory-product offerings with its $7.2 billion purchase of Millipore in 2010 (see IBO 3/15/10) to form Merck Millipore.

Pro forma Merck Millipore and Sigma would account for 35% of Merck 2013 EBITDA. “For the life science business, this is a quantum leap,” stated Merck CEO Karl-Ludwig Kley on the company’s analyst call discussing the transaction. “And for the company, again, this is really a step change because we are turning a reliable growth driver, which Merck Millipore was in the past, into a core earnings contributor for the future of the company.” Pro forma Merck Millipore and Sigma 2013 EBITDA pre–one-time items would increase 139% over Merck Millipore EBITDA.

Combined pro forma Merck Millipore and Sigma 2013 revenues would increase 79% over Merck Millipore sales. On a pro forma basis, Merck Millipore and Sigma’s 2013 sales combined would account for 35% of Merck sales. In comparison, Merck Millipore accounted for 25% of Merck 2013 sales of €10,700 million ($14,267 = €0.75 = $1). In 2013, Merck Serono, its pharmaceutical business, represented 56% of Merck sales, with the Performance Materials and Consumer Health businesses accounting for 15% and 4%, respectively. Total 2013 Merck revenues of €11,095 million ($14,793 million) include licensing revenue. Last year, organic sales for Merck Millipore grew 5.5% compared with 5.6%, 3.9% and 3.0% growth for Consumer Health, Merck Serono and Performance Materials, respectively.

For Merck, the acquisition provides a stable source of recurring revenue at a time of few drug introductions by Merck Serono, according to analysts. The acquisition also increases Merck’s profitability and cash flow, with EBITDA margins set to increase from 30% to 33%, assuming that the estimated €260 million ($338 million) in planned synergies are realized.

The acquisition creates a company with laboratory, process and service offerings spanning drug discovery, development and manufacturing, and a scale and breadth in the life science aftermarket surpassed only by Thermo Fisher Scientific. As with Thermo’s purchase of Life Technologies (see IBO 4/15/13), the acquisition creates scale, a more diverse product offering and geographical balance.

In 2013, sales for Merck Millipore grew 1.1% to €2,645 million ($3,527 million). Sigma-Aldrich’s 2013 revenues increased 3.1% to $2,704 million. Each company offers a broad range of life science consumables products. Together, the companies will supply more than 300,000 products. Merck Millipore holds leading positions in the bioprocess equipment, laboratory water and laboratory-chemical markets. Sigma-Aldrich is well established in laboratory chemicals, chromatography columns and gene editing. Overlapping product lines include analytical standards, microbiology products, antibodies and biochemicals, according to the conference call presentation. Both companies offer cell culture products, LC columns and buffers. Antitrust issues are not apparent.

For Sigma, the premium price per share of $140, 37% over the closing price on September 19, and 6.1 times sales was attractive. In addition, the scale and product range allow Sigma to more effectively compete with Thermo in the consumables market, especially as pharmaceutical firms consolidate the number of suppliers they use.

Both companies serve the pharmaceutical, biopharmaceutical and academic markets. Sigma will enlarge Merck Millipore’s presence in industrial end-markets such as food and beverage testing. As the graph on page 9 illustrates, the laboratory and academic market will account for nearly half of the combined companies’ annual sales, with the remainder divided between the biopharmaceutical and other industries. “Still talking about Sigma, laboratory and academia is a €25 billion business that we expect will grow in the low- to mid-single-digit range due to continued investment in pharma R&D and because emerging markets are fueling growth in scientific research,” commented Mr. Kley on a conference call with the media. “In that segment, we will nearly double our sales, offering a complementary range of products across laboratory chemicals, biologics and reagents.”

Discussing the other segments, Mr. Kley stated, “Biopharma and pharma production is an industry of around €35 billion in which we foresee growth in the mid- to high single digits. In that segment, we will have additions along the entire value chain of drug production and validation, particularly in buffer media, as well as services.” He added, “Finally, we will serve other industries such as food and beverage testing. That industry amounts to around €40 billion, and for that business we again expect mid- to high single-digit growth.”

Merck also cited Sigma’s ability to expand Merck Millipore’s US presence as a benefit of the acquisition. In 2013, the Americas accounted for 43% of Sigma’s revenues. For Merck Millipore, North America represented 27%. “We have an improved region, all geographies particularly in the US where we will double our revenue and as you know up to 50% of the life science is taking place in the US. So being a strong player in the US is mandatory for successful global business,” said Mr. Kley on the analyst conference call.

Merck Millipore will also benefit from Sigma’s e-commerce channel, according to Mr. Kley. “Sigma-Aldrich’s product line includes more than 230,000 products and solutions with a strong focus on products for research laboratories. Nowadays, more than 70% of those products are available through an e-commerce platform which, I am happy to admit, only deserves one title: It is a world champion,” he said on the media conference call.

Merck also highlighted the opportunities for product and process innovation, including new workflow solutions and an efficient supply chain. “With growth coming from trends like the increasing importance of genomic and proteomic research and disease diagnosis, success in the life science industry is defined by the ability to make innovation available efficiently to customers through access and service,” said Mr. Kley on the media conference call.

Merck estimates $340 million in synergies within three years of closing. On the analyst conference call, Merck CFO Marcus Kuhnert stated, “Thus, our review of these two businesses led us to conclude that the significant synergy potentials results from a number of sources, such as the consolidation of the manufacturing footprint, the increase and leverage of the world-class e-commerce platform of Sigma-Aldrich and, of course, also from the optimization of our commercial organizations as well as from streamlining of admin functions and infrastructure.” On the call, he stated that the majority of synergies would be in the form of cost savings.

< | >