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Why Merck Would Be Mad to Sell Coppertone and Dr Scholl's

Someone needs to slap Merck (MRK) CEO Kenneth Frazier for saying that he will consider "all the options," including a sale of the company's consumer health unit which markets Coppertone, Dr. Scholl's, Tinactin and a bunch of other unglamorous brands. A sale is the last thing he should do for four reasons:

  • History has proven -- in the form of Pfizer (PFE)'s notoriously misjudged sale of its consumer brands to Johnson & Johnson (JNJ) -- that such steady-eddie earners stabilize a company's revenue stream over time and smooth off the rollercoaster highs and lows of the prescription drug business, which is beset by sudden product launches and equally sudden patent expiries.
  • A consumer unit helps lower the company's average legal liability. Merck paid $4.9 billion to settle claims against its Vioxx painkiller. That sum may be high but drug litigation is common. No one sues Coppertone. It's easy money.
  • Some of those brands, like Coppertone, Dr. Scholl's and Bain de Soleil, are ripe for brand extensions and reinventions that could command incremental revenues -- if Merck has enough imagination and ambition.
  • Merck's prescription Clarinex anti-allergy drug faces generic competition in 2012 and thus becomes ripe for an eventual conversion to non-prescription, consumer drug status, just like Claritin. Handled properly, well-known brands that sit on the drugstore shelf can become household names that command generations of family loyalty despite the store's own brand sitting next to them.
Frazier is probably right that Merck's consumer portfolio is too small and not global enough. (It had $291 million in sales in Q3 2010.) But hiving it off is like killing a goose because it only lays the occasional golden egg. Better to buy more geese, as Sanofi-Aventis (SNY) did recently in its acquisition of Chattem.


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