J&J Picks Up Listerine, Nicorette With $16.6 Bil. Purchase Of Pfizer OTCs

Johnson & Johnson's successful bid to acquire Pfizer Consumer Healthcare extends the firm's reach in the global OTC market and provides entry into several new product categories.

J&J announced June 26 that it will acquire Pfizer's consumer business in a $16.6 bil. all-cash transaction that is expected to close by the end of 2006. Pfizer announced in February that it was deciding whether to sell or spin off its OTC unit, which brought in $3.9 bil. in 2005 sales.

The deal, which is subject to regulatory approval in both the U.S. and Europe, will nearly double the size of J&J's consumer division and will create the world's "premiere consumer health company," Chairman and CEO William Weldon said during a June 26 call announcing the transaction.

The purchase "solidifies" J&J's position as the leading OTC firm worldwide, said Colleen Goggins, worldwide chairman, Consumer & Personal Care group. It also "significantly diversifies our current portfolio and provides entry into higher growth categories," she said.

New Markets, More Growth

J&J pointed to several aspects of the deal that are expected to drive growth for the consumer division - namely the firm's acquisition of U.S. Rx-to-OTC switch rights for the non-sedating antihistamine Zyrtec (cetirizine HCl).

Weldon noted during the call that the drug was the number one most prescribed non-sedating antihistamine in the U.S. in 2005, with annual sales of $1.5 bil. No timeline for a switch was provided, but Pfizer noted that Zyrtec goes off-patent in December 2007.

However, Zyrtec's relatively late entry into the OTC antihistamine market makes it difficult to gauge how successful a switch may be.

Nicorette is another brand J&J will look to for growth as it completes the transaction. The firm has acquired the ex-U.S. rights to the smoking cessation therapy. GlaxoSmithKline markets the brand in the U.S.

"We expect the growth of Nicorette to accelerate as governments outside the U.S. take aggressive steps to reduce cigarette smoking," Goggins said.

"If you think about the trends that increased cigarette smoking has [created], and the burden that that places both on healthcare and the economies to deal with the consequences of tobacco smoking, then you can see the kind of growth opportunity that we see, just for that individual brand," said Christine Poon, worldwide chairman, Medicines & Nutritionals.

Listerine mouthwash also will boost sales and expand J&J's presence in the oral care market.

The product "will transform our oral care franchise into a billion-dollar-plus business and expand our presence in 60 markets," Goggins said. It also will "help strengthen our relationships with leaders in dental and medical communities globally."

Listerine will complement J&J's Reach brand of toothbrushes and flosses, as well as its ACT fluoride rinse. J&J also recently added the Rembrandt line of toothpastes and whitening products to its oral care portfolio when it acquired the brand from Procter & Gamble's Gillette division in October (¹ (Also see "Rembrandt Purchase Brings Whitening Category To J&J" - Pink Sheet, 31 Oct, 2005.), p. 7).

The acquisition allows J&J to expand its global presence, since more than 50% of Pfizer's OTC sales take place outside the U.S., Goggins noted. It also "extends our leadership position from 13 to 22 healthcare categories and provides an entry point into sizeable new segments," she added.

Safe vs. "Sexy"

While J&J touted the merger for its potential to drive sales, some financial analysts questioned the move.

"The deal does make operational sense based on operational and distribution synergies, but is not the 'sexy' acquisition target in pharma, biotech or med tech that most investors and analysts were looking for," Citigroup's Matthew Dodds states in a June 27 research note.

"Hence, yesterday's announcement didn't receive a warm ovation as the stock traded down nearly 2%," he adds. J&J's stock price closed on Friday, June 23 at $61.74 but opened on Monday, June 26 at $59.60 after the early morning announcement of the deal.

"We don't expect the addition of this consumer business to augment J&J's overall growth rate at all."

The analyst characterizes the Pfizer consumer business as "mature but safe" and notes that by purchasing the unit, J&J is "essentially becoming more comfortable" and low risk by offering the "broadest level of diversification in the healthcare space."

Following the Pfizer integration, J&J says 40% of its business will be pharmaceuticals, with 35% devices and diagnostics and 25% consumer products.

While Dodds agrees that diversifying will lower volatility, he says it may suggest J&J is "finding fewer high-growth platforms that offer a compelling return and/or has become more risk-averse to issues of healthcare regulation, reimbursement and media scrutiny."

If scrutiny of the healthcare industry becomes more challenging, investors "will be glad J&J's consumer business has more heft," he states. "On the flip side, J&J is less likely to fully participate when sentiment in the healthcare sector recovers."

He also estimates that the Pfizer consumer business will grow sales in the 6% range over the next four years, which he says is in line with J&J's consumer business prospects but down from the 10% growth reported by the Pfizer division in 2005.

Pfizer reported in April that first quarter 2006 sales for the consumer division were down 5% over the prior-year period (² (Also see "Pfizer Consumer Healthcare Revenue Is “On Plan,” McKinnell Says" - Pink Sheet, 24 Apr, 2006.), p. 4). During the June 26 conference call, Goggins said the sales dip was being viewed as an "anomaly."

The Rise Of Self-Care

Still, J&J maintains that a growing global self-care market makes it wise to invest in consumer products.

Weldon stated that J&J is pursuing an expanded role in the nonprescription market because OTC use is "growing rapidly in both mature and emerging markets as consumers take greater responsibility for the healthcare decisionmaking and look for ways to control costs."

In addition, "increased disposable income in developing nations is also helping drive increased demand for consumer health products," he said.

The executives also pointed to several Pfizer brands that will complement the firm's current OTC portfolio. For example, Pfizer's Visine eye drops brand supplements J&J Vision Care's Acuvue contact lens franchise, while Pfizer's Neosporin ointment aligns with J&J's Band-Aid brand.

The H2-antagonists owned by both firms - J&J's Pepcid AC and Pfizer's Zantac 75 - create overlap that may be targeted during FTC review of the sale.

Pfizer's Benadryl and Sudafed "will expand our presence in the OTC upper respiratory market," Goggins noted. J&J's current cough/cold product offerings include several SKUs within the Tylenol analgesic brand.

CFO Bob Darretta expects the largest portion of financial value from the acquisition to be achieved through longer term ongoing growth. However, potential cost synergies of the combined entities are estimated in the range of $500 mil.-$600 mil. per year, he said, and should be fully realized by 2009.

Dodds writes in his research note that the synergies are expected in the areas of promotion, distribution, manufacturing and personnel.

Billion-Dollar Bidding Wars?

Though some analysts are questioning J&J's move toward a more diversified portfolio, the price that the firm paid for the Pfizer brands demonstrates how coveted the division was among bidders.

The $16.6 bil. paid by J&J was higher than the amount originally anticipated for the unit. When Pfizer announced it was reviewing its options for the division, CEO Hank McKinnell said the price could be driven above $10 bil. (³ (Also see "Pfizer Eyes Consumer Unit Spin-Off Or Sale Price North of $10 Bil." - Pink Sheet, 13 Feb, 2006.), p. 5). Estimates that followed were in the $14 bil. range.

"This suggests that at least one of the other bidders - the press has suggested GSK - was aggressive in its pursuit of this business," Dodds says in his note.

The pricetag is more than four times the 2005 sales of the division, while average prices in the consumer segment are two times annual sales, one analyst noted.

J&J's Darretta agreed that the price "represents a multiple that's higher than what's been the typical experience in the consumer segment."

"This is a very different set of assets, however," he said. "This is an extraordinary set of assets which, particularly unique we think, is the enduring nature of the assets coupled with being positioned in categories that are exhibiting higher rates of growth."

In the past, firms have paid lower multiples for assets that "were not achieving the same growth rates as these assets have been achieving, and we think we're only going to accelerate that rate of growth once it's under our ownership," Darretta said.

- Bridget Behling