Last week, we featured a Supply Chain Matters commentary, Major Supply Chain Disruption On-Tap for Pharmaceutical and Drug Focused Supply Chains. The commentary outlined our concern that the current new wave of large-scale merger and acquisition activity involving billions of dollars that is currently surrounding the pharmaceutical and drug sector provides added risks to derail and add incredible distraction and disruption to ongoing supply chain improvement efforts.

Today, there is yet another development that adds to the potential for disruption.  German based Bayer AG has announced its intention to acquire the consumer care business of U.S. pharmaceutical firm Merck & Co. for an approximate purchase price of $14.2 billion. This transaction is subject to approval from various antitrust agencies with a closing expected in the second-half of 2014.

The acquisition is characterized by Bayer as the path for providing global leadership in over-the-counter (OTC) and non-prescription medicines. The announcement comes after Merck conducted an auction-like process seeking a high bidder for its OTC business.

According to the announcement, the acquisition will place Bayer in the number two market position in OTC products. Merck’s OTC categories include cold, allergy, sinus, dermatology, foot health and gastrointestinal medicines. Principle Merck brands included are Claritin©, Coppertone©, Dr. Scholl’s© and MiraLAX© which each have a strong presence in North America markets. Merck’s consumer care business is reported as generating 70 percent of revenues in the U.S. market.

Bayer indicates in its announcement that it expects” “… the integration of the businesses to generate significant cost synergies, for example in marketing spend and cost of goods, in the region of USD 200 million by 2017. “  Paying upwards of a premium of 6.5 times 2013 revenues and 21 times earnings, Bayer has no choice but to drive cost synergies.

From our supply chain and B2B lens, implies the potential for disruption over the next few years since this types of estimates turn out to be overly aggressive. Bayer inherits more diverse North America distribution and retail channels where cost and healthcare delivery are under intense scrutiny. Both Bayer and Merck manage their businesses with an SAP focused enterprise information backbone.

A published report by Reuters points out that OTC drugs units carry far lower margins than prescription drugs businesses but some drug makers regard them as attractive due to the stable stream of cash that these products can generate. Further, they often require less spending on research and development and can be less exposed to the loss of patent protection where consumers remain loyal to a brand. The combined OTC revenues among the combination of Bayer and Merck are expected to exceed $7 billion in annual revenues.

Thus, the wheels of business change and the potential for multi-year distraction becomes prevalent for two different global corporations with different cultures and business process practices.

Who knows what other major industry announcements are in-store for the remainder of May, as well as 2014.

Bob Ferrari