Glaxo/Novartis JV Wields ‘Power’ Brands, Switches To Spearhead Global Growth

Glaxo prioritizes seven “power” brands globally and also will invest in boosting sales of 12 “core” brands in its consumer JV with Novartis, says division head Emma Walmsley. The combination of the two firms’ consumer products puts the JV atop the OTC/wellness market in 36 countries.

Seven brands will be the tip of the spear and OTC switches will provide additional ammo “every five years” for the GlaxoSmithKline PLCand NovartisAG joint venture targeting global domination in consumer health care product sales, says the JV’s head, Emma Walmsley.

The Glaxo-operated JV’s global focus tracks the selection of its “power” brands. While three are common in the U.S. – Theraflu cold and flu products (acetaminophen, chlorpheniramine, dextromethorphan and pseudoephedrine), Sensodyne sensitivity toothpaste (potassium nitrate) and Polygrip denture adhesive – the others are either bigger on the international stage or not marketed in the U.S. – pain-relievers Voltaren (topical diclofenac 1%) and Panadol (acetaminophen), sodium bicarbonate-based toothpaste Paradontax, and Otrivin (xylometazoline) adult nasal spray.

“As well as sharpening our geographic focus, we are sharpening up our choices around brands and we have segmented this newly strengthened portfolio,” said Walmsley, GSK Consumer Healthcare president since 2011 and named head of the JV when it was announced in April 2014. [See Deal]

Rx-to-OTC switches also are counted on as growth drivers for the JV. “This is a proven capability for GSK. It is one that we are investing in and we expect and plan to target a switch every five years,” Walmsley said, noting the launch of Flonase Allergy Relief in February (Also see "Glaxo Launches Flonase OTC, Banks On More Consumer Growth Drivers" - Pink Sheet, 5 Feb, 2015.).

JV’s Power Brand Origins

Novartis: Theraflu, Voltaren, Otrivin

Glaxo: Sensodyne, Paradontax, Polygrip, Panadol

Walmsley and Glaxo’s other division heads outlined expectations during a May 7 briefing for analysts as the firm laid out a five-year growth strategy incorporating the Novartis deal and reflecting the firm’s re-grouping into three divisions: pharmaceuticals – 59% of its business, consumer health care – 25%, and vaccines – 15%.

OTC Lead In 36 Countries

In addition to track records of success with potential to grow ahead of category growth, each power brand is present in 70 to 114 countries, has higher-than-average growth margins and is expected to deliver double-digit market growth rates, Walmsley said.

She said the JV will lead the OTC market in 36 countries, up from Glaxo’s 13 on its own, and is expected to drive mid-single-digit compound annual growth rate for the division between 2016 and 2020.

The JV also will invest in 12 “core” brands it will develop regionally. Although those yet-to-be-disclosed brands bear similarities to the power brands, they are not prioritized for geographic expansion, Walmsley noted.

“It's the power brands and the core brands that will drive 90% of our growth,” she said, adding that the brands will account for about £6 billion ($9.08 billion) in annual sales, split between OTC drugs and other consumer health care products.

Notable among the brands marketed by the JV that did not receive the power designation but might be part of the core lineup are Glaxo’s alli (orlistat) weight loss OTC and Novartis’ Excedrin (acetaminophen) pain reliever.

Anticipated as a one-of-a-kind catalyst for Glaxo’s consumer business growth at its 2007 launch, alli’s history instead has been marked by slow consumer uptake, interruptions in ingredient supplies and recalls including a recently ended year-long absence from U.S. stores due to post-distribution product tampering reports (Also see "Alli Return In U.S. Fattens Glaxo’s Consumer Outlook" - Pink Sheet, 25 Feb, 2015.).

And while Excedrin once was an iconic brand in the OTC space, its sales have slowed behind other brands and private label products as Novartis stumbled in its consumer business operation. Its decision to operate a JV with Glaxo was influenced by manufacturing problems at its Lincoln, Neb., facility that led to recalls of Excedrin and other brands and prompted Novartis to cease making OTCs at the site (Also see "Novartis OTC Plant Troubled By Quality Failures A Year After Shutdown" - Pink Sheet, 6 May, 2013.).

GSK/Novartis JV Q1 Numbers
Glaxo’s consumer health care earnings figures for the January-March period represent the joint venture with Novartis and GSK Consumer Healthcare businesses in India and Nigeria, which are excluded from the JV. U.S. sales increased 47% on a reported basis to $502.6 million, primarily benefiting from the launch of Flonase Allergy Relief, with sales of $99 million and double digit growth on Sensodyne toothpaste.
Region	Revenues (millions)	Reported % change from year-ago period
U.S.	$502.6	47%
Europe	$554.3	32%
International	$1,046.3	12%
Total	$2,103.2	24%
Category	Revenues	Reported % change from year-ago period
Wellness	$903.1	46
Oral health	$738.6	9
Nutrition	$277.2	2
Skin health	$184.3	42

Additional GSK OTC brands not on the power list include Gaviscon (aluminum hydroxide; magnesium trisilicate) heart burn reliever, Nicorette (nicotine polacrilex) nicotine replacement therapy and Tums antacid; other Novartis brands are Prevacid 24HR (lansoprazole) heartburn reliever, Triaminic (chlorpheniramine and phenylpropanolamine) allergy and cold relievers and Lamisil (terbinafine) antifungal cream.

R&D Pipeline Will Contribute

Distribution opportunities abound for power brands given new market entry points through the JV, Walmsley said.

Novartis’ Voltaren topical pain-relief brand, for example, “has not had strength of distribution where topicals historically do,” but through GSK’s distribution it will be available in Japan, China and India, she said.

Potential for Voltaren is significant as a recent survey found 88% of adults worldwide suffer pain every week but only half actually treat it, noted Walmsley. Further, the baby boomer generation holds promise as the product targets consumers over 55 as well as osteoarthritis sufferers, she said.

Glaxo also will invest in research and development for the long-term by combining consumer insight with its science-led pipeline, Walmsley added.

“We are doing this by pulling together our markets and R&D teams and regulatory and technical excellence and medical teams” in London, New Jersey, Switzerland, India, China and Singapore, she said. A third of the firm's R&D organization will be based in emerging markets, she noted.

GSK expects the consumer JV portfolio will deliver at least a 20% operating margin by 2020, a margin achievable with the firm's “ambitious” integration plan that Walmsley expects will deliver around $610 million in synergies by the end of 2017.

The firm plans to reduce its commercial locations by half and “improve agility” by removing layers of management and “reducing interfaces traditionally in complex organization between regions and areas in local markets,” she said.

Walmsley said the integration of the business leaves GSK “well-positioned to be a global leader in this exciting and high-opportunity category for the long-term.” The strength of the firm will come despite what the exec sees as a fragmented consumer health market that will be consolidating significantly over the next 10 years.

Glaxo, which expects OTC drugs to account for $5.72 billion of the JV’s overall sales, has 63.5% control and Novartis 36.5% in a split that reflects each firm’s proportional contributions to the arrangement. As minority holder, Novartis has an exit strategy, if needed. A 20-year put option allows it to sell its share after three years (Also see "Glaxo And Novartis Scratch Each Other’s Back With Consumer Product JV" - Pink Sheet, 23 Apr, 2014.).

In addition to establishing the JV, the firm’s agreement moved GSK’s marketed oncology brands to Novartis and Novartis’ non-flu vaccines business to Glaxo. The firm, due to other business developments, it decided to reduce the amount of cash it will return to shareholders from the proceeds generated from the asset swap with Novartis (Also see "ViiV IPO Plans Ditched By GSK; New Plan Is To Retain Value" - Pink Sheet, 6 May, 2015.).

[Editor's note: Each week, "The Pink Sheet" DAILY features a story from "The Tan Sheet" highlighting a current topic in the consumer medicines or dietary supplements sectors.]