Germany's Merck considers sale of consumer health business

* Liquid (Frankfurt: A1W3N8 - news) crystal decline curbs ability to fund expansion

* Proceeds to be used to meet financial targets

* Unit could fetch around $4.4 billion - analyst

* Shares (Berlin: DI6.BE - news) rise more than 2 percent (Adds background on consumer health industry)

By Georgina Prodhan and Ludwig Burger

FRANKFURT/COLOGNE, Sept 5 (Reuters) - Germany's Merck KGaA (LSE: 0O14.L - news) is considering selling its consumer healthcare business which has sales of $1 billion a year to help fund more research into prescription drugs and amid declines in the company's separate liquid crystal business.

The company said on Tuesday that to remain competitive the consumer healthcare business would need further investment and therefore it was considering a sale or strategic partnership instead, adding that a review process was at an early stage with a final decision expected to be made early next year.

"We expect increasing internal constraints to fund the business to reach the required scale. Fully anticipating this, we are preparing strategic options," Belen Garijo, chief executive of Merck's entire Healthcare (Shanghai: 603313.SS - news) division, said in a statement.

"Any possible proceeds from a potential transaction would be used to deliver on the company’s overall financial targets," she said.

Industry experts have for years viewed the consumer business, which includes nutritional supplements Seven Seas and Bion and decongestant Nasivin, as lacking critical mass. A sale of the business could fetch around $4.4 billion, Bernstein analysts estimate, based on recent deal multiples.

"Consumer health is an industry ripe for consolidation and there are a handful of key players who may participate in the process," Bernstein wrote, mentioning Reckitt Benckiser (Xetra: A0M1W6 - news) as a front-runner, but also GlaxoSmithKline (Other OTC: GLAXF - news) , Johnson & Johnson, Bayer (IOB: 0P6S.IL - news) and Sanofi (LSE: 0O59.L - news) , as well as a less obvious prospective buyer such as Nestle (Swiss: NESN.VX - news) .

Sources have said that management has informally sounded out prospective buyers on numerous occasions over the years, only to be held back by the founding family, which owns 70 percent of Merck and favours a diversified strategy whereby reliable earnings from over-the-counter pain and cold remedies and supplements help smoothe out volatility from prescription drugs.

Merck, which traces its roots to a 17th century pharmacy, is focusing its healthcare division on drug development, pinning growth hopes on cancer immunotherapy treatment Bavencio and multiple sclerosis pill Mavenclad after a string of setbacks.

It has also built a global biotech laboratory supplies business with takeovers of Millipore and Sigma-Aldrich in 2010 and 2016.

The strategic review comes as Merck is grappling with declining sales at its liquid crystals business, a supplier of the chemicals used in LCD screens and a major source of cash flow for the group.

The highly profitable crystals business accounted for about 15 percent of group earnings last year, according to Deutsche Bank estimates, even after Merck sought to diversify by spending billions on takeovers in the laboratory supplies industry in recent years.

But new Chinese rivals are chipping away at its dominant market position.

Merck has forecast roughly flat core earnings of 4.4 to 4.6 billion euros for 2017 and a slight to moderate organic increase in sales.

Its shares closed 2.4 percent higher at 94.26 euros, the top gainer in the German blue-chip DAX index.

HEALTH OF CONSUMER HEALTH

The global market for consumer health products is worth an estimated $233.2 billion in retail sales this year, according to Euromonitor International, which ranks Merck's business in the sector as the 32nd biggest, with a 0.4 percent share of a very fragmented market.

It has proved fertile ground for deals in recent years, as ageing populations and health-conscious consumers drive demand. Nestle, the world's biggest food company, recently said it was interested in the sector, which also includes sports nutrition and weight management products.

Yet the key U.S. market has come under pressure due to cost-conscious shoppers and drug-store mergers and acquisitions putting a lid on pricing power.

Meanwhile UK-based Reckitt has made consumer health a strategic focus in recent years, making several acquisitions.

Despite having just closed a $17 billion purchase of baby foods maker Mead Johnson, Bernstein estimates Reckitt could still make a bid for the Merck business, especially if it sold its homecare products business. Reckitt declined to comment on whether it might be interested. ($1 = 0.8406 euros) (Additional reporting by Martinne Geller in London; Editing by Maria Sheahan, Greg Mahlich)