GSK Divests Non-Core OTCs To Focus On "Priority Brands," Emerging Markets

GlaxoSmithKline will divest non-core OTC products to accelerate consumer health care growth and help fund a share buy-back program following a financial wipeout in the firm's most recent quarter.

The U.K.-based drug maker plans to sell non-core OTC brands in Europe and America worth about £500 million in sales ($808.4 million under same-day conversion rates) – representing about 10% of its consumer health care business, CEO Andrew Witty announced Feb. 3.

"The intention is to return the proceeds of that transaction to shareholders as soon as the transaction is completed," he added during a fiscal 2010 fourth-quarter earnings call.

Overview Of GSK's 2010 Results

• Net sales down 1% to $45.9 bil.

• Consumer Health sales up 5% to $8.08 bil.

• OTC sales increase 3% to $4 mil.

• Nutritional sales rise 9% to $1.5 bil.

• Oral health care up 6% to $2.57 bil.

The sales will generate necessary cash flow to underpin further a 2011 share buy-back program, which GSK announced the same day, analysts with Jefferies International say in a research note.

The buy-back of $1.62 billion to $3.23 billion of shares should drive earnings momentum and help soothe the sting of a 1% drop in overall net sales to £28.39 billion ($45.9 billion) in fiscal 2010, the analysts add.

The Jefferies note also points out that for the October-December period, GSK's overall sales dropped 13% to $11.6 billion.

Panmore Gordon & Co. analyst Savvas Neophytou noted the OTC brand sale should generate a total of between $2.7 billion and $3.2 billion for the firm, but was rather bearish about GSK's outlook for 2011.

Neophytou stated GSK's guidance for $970 million in revenue was more positive than Panmore Gordon expected, and expects operating margin to contract in 2011.

"As expected, 2011 will not be a growth year," Neophytou's same-day note states.

"Nice" But "Smaller" Brands Available

While Witty did not name specific brands on the chopping block, he characterized them as "very nice brands" that "tend to be more regional or maybe in one country or two countries or three countries."

"They tend to be smaller and they don't have, for us, the focus which would give you growth," the CEO added.

GSK recently sold Geritol multivitamins and Feosol and Palafer iron supplements to Meda Pharmaceuitcals for $34.5 million (Also see "Meda Tacks On U.S. Supplements As GSK Cleans Out Medicine Cabinet" - Pink Sheet, 20 Dec, 2010.).

Other divestments of non-core assets include the sale of its stake in Quest Diagnostic for net proceeds of $1.1 billion.

GSK also sold its remaining interest in prescription cold sore reliever Zovirax cream and ointment formulations in North America to Valeant Pharmaceuticals for $300 million, Witty said.

GSK Focuses On "Priority Brands"

Shedding the lesser OTC brands will allow GSK to focus on OTC "priority brands and on the emerging markets" for consumer health care products, Witty said.

He said "15 or so global brands" make up 90% of the consumer health care business' sales, which grew 5% to $8.08 billion in fiscal 2010.

OTC sales in particular grew 3% to $4 million in the quarter, with strong growth from the painkiller Panadol (acetaminophen) and smoking cessation products, which lower sales of the weight loss drug alli (orlistat) offset slightly.

Another product GSK will keep is Sensodyne toothpaste – its largest consumer health care product and one of its fastest growing products with 18% increase in global sales last year, Witty said.

One reason for the brand's success was GSK's successful launch of Sensodyne Rapid Relief in 50 countries over six months, he explained.

Another factor in the brand's growth was GSK's dedication to increased research and development funds for consumer health products.

GSK research and development spending on the segment grew 17% in 2010, Witty noted.

The toothpaste's success helped drive up GSK's overall oral health care annual sales 6% to $2.57 billion, the firm said.

Other global brands GSK likely will hold on to include Panadol, Lucozade energy drinks and Horlicks relaxant beverages.

Strong sales of Horlicks in international markets drove a 9% increase in GSK's nutritional health care segment to $1.5 billion, noted Julian Heslop, GSK's finance director.

Emerging Markets Vital For OTC Growth

Emerging consumer health markets on which GSK will focus include India and China, "where the growth is just phenomenal" and the firm can "access great distribution synergy with our pharmaceutical business," Witty said.

Consumer health care sales grew 19% in India and 18% in China, according to the firm. U.S. sales trailed with a 1% increase from 2010 to $1.62 billion.

Full-year European consumer health care sales were flat at $3.2 billion, GSK reported.

By Elizabeth Crawford