Potential Buyers Assess Available OTC Assets From Disparate Views

As Merck KGAA and Pfizer shop their consumer health businesses, large pharmas J&J, Bayer AG and Sanofi, health and household care marketer Reckitt Benckiser and a smaller firm expanding its OTC focus, Prestige Brands, are among the firms with reasons to consider changing their own consumer health lineups.

OTC drug sector competitors regularly evaluate multiple strategies and timelines to grow their businesses. Those evaluations are getting a brighter spotlight as Merck KGAA and Pfizer Inc. shop their OTC drug and vitamin, mineral and supplement (VMS) businesses.

Potential suitors for those businesses include large pharma firms Johnson & Johnson, Bayer AG, Sanofi and GlaxoSmithKline PLC, health, hygiene and household care marketer Reckitt Benckiser Group PLC and a smaller firm expanding its OTC focus, Prestige Brands Holdings Inc.

Some, like Bayer and Prestige Brands, have near-term preoccupations that might make acquisitions more challenging, but J&J, Sanofi, RB and GSK could be well-positioned to make deals for available assets.

Bayer Looks Internally

Bayer's potential for adding to its consumer business is could be challenged by its ongoing integration of the OTC drug and VMS brands it acquired from US firm Merck & Co. Inc. in 2014. The division's sales were down 2.9% from the year-ago quarter to €1.3bn ($1.5bn), adjusted for currency exchange impact, the German firm reported on Oct. 26.

The former Merck OTC antihistamine line Claritin was a bright spot in Bayer's consumer sector during the July-September period as China and US sales drove 9.3% growth for the brand.

Sales of a second former Merck brand, Coppertone sun care products, plummeted 44.6% during the quarter on stiff competition in the US, where sales of the Aleve pain relief and One A Day vitamin lines also are lagging.

As promising as potentially available consumer health brands may be, Bayer is looking internally first to boost the sector's growth. As CEO Werner Baumann put it during Bayer's same-day briefing, "pruning of the tail is a good practice in each and every consumer business."

And pruning could be more likely currently than in previous years, he suggested. "Wherever we see some of our brands that we don't support commercially or let's say promotionally anymore, that would be better served in the hands of mostly smaller companies, we do divest of them," the CEO said.

"Now in 2017, in particular, that level is somewhat elevated. There is no doubt about it," Baumann added. "Going into 2018, we will, of course, continue to prune our portfolio as we've done in 2017 and prior years."

Sanofi Looks Long-Term

Sanofi notes the long-term potential for consumer lines. Commenting on the potential Merck KGAA and Pfizer consumer business sales, Executive Vice President-Consumer Health Care Alan Main said: "I'm not sure that the reason that these assets are coming up for sale now are really to do with the long-term prospects of the [consumer health] market."

Despite "some ups and downs of course because of seasonality and challenges in terms of changing market models," he added during the firm's Nov. 2 earnings briefing, "generally, the prospects are positive." Main said he doesn’t doubt that Merck and Pfizer are considering leaving the consumer space to increase their pharma focus.

Main also noted that when Pfizer previously exited the consumer market, selling its then business to J&J in 2006, he was part of Sanofi's team that evaluated those assets. "I think this is really much more about focusing rather than about the long-term prospects of the [consumer health] sector," he said.

Meanwhile, net sales of Sanofi's consumer business during the July-September period grew 1%, adjusted for constant currency, to €1.13bn ($1.3bn). Global sales for its Allegra 24HR OTC allergy line were down 2.1% to €87m ($101.4m) and total US consumer product sales were down 3.8% on growing private label competition for the NasacortAllergy 24HR OTC intranasal corticosteroid.

Fleet Looks Strong For Prestige

Prestige Brands, which reported results from its latest quarter on Nov. 2, continued its march toward becoming a predominantly OTC drug marketer early in 2017 by closing its acquisition of C.B. Fleet Co., adding brands including Summer's Eve douche, Pedia-Lax pediatric laxatives and namesake enemas and glycerin suppositories while also expanding its consumer health manufacturing capacities and its international footprint.

In addition to integrating Fleet's operations, adjusting to growing e-commerce competition, particularly with Amazon's entrance into OTC drug in addition to VMS sales, will likely occupy all of Prestige Brands' operational bandwidth in the consumer health space.

"Our strategy is to make sure that we've got those products available wherever they may show up, whether it's drug, mass, grocery and online. We've made an investment and focusing on making sure our brands are available online and we've seen nice growth in that, although starting off with a very small base," said President and CEO Ron Lombardi during Prestige Brands' earnings briefing.

The firm said during the July-September period, its fiscal 2018 second quarter, its North American OTC revenues of $215.3m were up 24.9% from the year-ago period "principally driven by revenues from the acquisition of Fleet." International OTC sales were $21m, up 11.4% and also helped by the Fleet transaction.

J&J Would Look

Johnson & Johnson, perhaps the top candidate for purchasing divested Pfizer or Merck brands, on Oct. 17 reported that a 1.9% gain from currency exchange helped drive total OTC drug sales past $1bn. US revenues, unaffected by exchange rates, grew 3.9% to $401m and the international business was up 4.7%, including a 3.2% currency boost, to $601m.

Jorge Mesquita, J&J's worldwide consumer business chairman, said the firm would consider adding OTC drug assets from other firms. "As assets become available, we systemically evaluate them,” Mesquita said during the firm's earnings briefing. (Also see "Nicorette, Tylenol Ease J&J's Consumer Pain From Slow Oral Care Sales" - Pink Sheet, 18 Oct, 2017.)

While J&J periodically divests a consumer health brand that doesn't meet its growth expectations or fit into its market strategy, the firm isn't likely to prompt speculation that it would leave the OTC drug sector. The consumer business, which includes the Tylenol, Motrin, Zyrtec and Listerine OTC brands as well as Neutrogena, Aveeno, Clean & Clear and Johnson's skin and hair care lines, is a reliable revenue driver even when sales slump in the more volatile Rx drug and med tech markets, the firm's executives have said. (Also see "J&J Rides Consumer Health ‘Growth Annuity’ As Rx, Device Divisions Slow" - Pink Sheet, 20 Jul, 2015.)

Still other players in making potential changes to the consumer health landscape include Church & Dwight Co. Inc., which has said it could parlay the gummy format it uses for its vitamin lines into an OTC line, (Also see "Church & Dwight Shapes Potential OTC Play On Gummy Format" - Pink Sheet, 9 Nov, 2015.)

A more recent entrant into the global consumer health space that could be a factor in brands or businesses changing homes is French firm HRA Pharma SA, which adjusted its focus to consumer health in 2016 and earlier in 2017 closed its acquisition of the Compeed wound-care brand from Cilag GMBH International, a J&J company.

From the editors of the Tan Sheet.