Unlock M&A Growth Potential Through Outsourcing
Executive Summary
Adopting an effective outsourcing strategy will enable consumer healthcare players to get the most out of their acquisitions, says Baird’s Vincenzo di Nicola.
Frenetic merger and acquisition (M&A) activity in the global consumer healthcare market is creating a host of new challenges for both established OTC players and new market entrants, according to Vincenzo di Nicola, managing director of European investment banking at financial services group Baird.
Addressing delegates at the 13th Annual Ceuta International Alliance conference in London, di Nicola said all companies engaged in this activity – whether multinational or regional OTC players, private-equity firms or entrants from adjacent industries – shared a common goal: maximising return on investment and expanding the reach of their brands. But this was not easy, he admitted.
For the large players, di Nicola said M&A was creating increasingly complex portfolios, leading to so-called ‘tail-end’ brands being overlooked. Regional players that snapped up new products faced the challenge of growing them in unfamiliar markets, he noted, while private-equity acquirers lacked a sizeable infrastructure to quickly expand the business. Furthermore, new entrants to the market – often from the fast-moving consumer goods (FMCG) industry – did not have the “domain expertise” to make a success of their acquisitions in the unfamiliar consumer healthcare space, he explained.
The key to resolving all of these issues, di Nicola maintained, was brand outsourcing. “The solution that all these different groups of buyers are looking for is brand management, brand fostering,” he argued, “[an outsourcing provider] that brings optimisation, rationalisation, augmentation of sales, as well as management of the supply chain.”
Now was the time for firms to explore how outsourcing could help them drive growth, di Nicola insisted, with the frenetic pace of acquisitions and divestments in the consumer healthcare sector set to continue.
“M&A activity in consumer healthcare remains very strong,” di Nicola pointed out. “Year-to-date, deal volume is up 5%, and over the past three years there have been over 420 deals, with an average size of US$0.5 billion.”
"The sector fundamentals are very strong, the growth is robust, there is a proliferation of new regional brands that want to become international."
“What is driving this activity? The answer is easy,” he observed. “The sector fundamentals are very strong, the growth is robust, there is a proliferation of new regional brands that want to become international, and there is a growing adoption of OTC medicine in emerging markets, such as the Middle East.”
Looking at the share of recent M&A activity by investor class, the top-20 OTC firms were some of the most “aggressive buyers”, di Nicola noted, accounting for 26% of deal volume over the past three years. These larger players were looking for scale gains to “protect market share and offset competitive threats”, he claimed. “They are also buying to get into new attractive segments, with new target consumer groups, where they see increasing growth,” he added, “such as sports and nutrition, and vitamins, minerals and supplements.”
After the top-20 players, the second most active investor class were financial buyers – private equity, investment funds and merchant banks – di Nicola explained, accounting for around 24% of M&A activity. Private-equity firms were attracted by the “strong, robust growth” of the consumer healthcare sector, but also its fragmentation
Private equity spy consolidation opportunity
“If the top-20 incumbents only account for 30% of total consumer healthcare revenue, there is 70% of the market that theoretically could be consolidated,” di Nicola pointed out. “For private equity, there are horizontal and vertical consolidation opportunities to build global platforms,” he said. “So they can buy brands, services around brands, and they can expand internationally.”
Consumer healthcare investments also gave private equity an opportunity to reduce their exposure to government funded risk, di Nicola explained. “Historically, private equity has invested in a lot of government funded services in healthcare, but now they want to diversify their portfolios and consumer healthcare gives access to out of pocket money.”
Furthermore, the demand for assets in the OTC market offered private-equity firms a clear exit pathway, di Nicola noted. “When a private-equity player builds an international platform, they know that there will be buyers waiting that are looking to maintain market share or get hold of specific brands.”
The remaining M&A activity not accounted for by private equity or the top-20 firms – around 50% – was attributed by Baird to ‘others’, the most significant of which included FMCG players looking to tap into consumer healthcare and regional firms targeting international expansion.
“FMCG firms are the most active in this group,” di Nicola noted. “The rationale is pretty straightforward – there is an overlap in terms of channels, as well as the supply chain,” di Nicola explained. “But the key reason is they want to offset declining growth in their core markets, to get a slice of the solid growth the consumer healthcare sector is providing today.”
While the investors in consumer healthcare were diverse, di Nicola said outsourcing could offer all players, large or small, significant benefits.
Multinational OTC firms needed to work with partners that could “optimise, rationalise and help them foster” their increasingly complex portfolios, di Nicola asserted. Following a deal, the top-20 players often shifted marketing focus from older brands to the newly-acquired assets, di Nicola noted, but it was vital that these brands did not become “unloved”.
“These old brands are still very important if you look at their contribution to gross margin,” he said. Outsourcing partners could address this issue by providing access to “specialised capabilities and growth-enhancing services”.
Turning to financial buyers, di Nicola suggested that these investors should work with a partner that could offer “market access”. “Someone that can take the brands and commercialise them in as many markets as possible. They need a partner to manage the supply chain,” he noted, “someone that brings data and insights.”
Outsourcing helps to boost sales
“Outsourcing services provide unique go-to-market solutions to maximise sales of acquired brands,” di Nicola argued, “while keeping investments at low levels.”
FMCG players too would benefit from working with partners that could maximise sales of newly-purchased assets, di Nicola said, while regional firms looking to grow beyond their domestic market needed an outsourcing provider that brought “market access, domain expertise and supply chain management”.
With such furious M&A activity in consumer healthcare, now was an “exceptional time” for brand owners and outsourcing service providers to “build strategic relationships”, di Nicola claimed.
“This is an opportunity for outsourcing service providers to build solutions or infrastructure that helps brand owners to maximise potential opportunities and unlock growth in the consumer healthcare sector,” he argued.
For consumer healthcare investors unsure of the value of outsourcing, di Nicola pointed to the proliferation of such activity in the pharmaceutical industry.
“The outsourcing penetration in pharma over the past 10 years has been growing at rates of 10%-15% and in some segments, 60%-70%,” he pointed out. “We see the outsourcing penetration in consumer healthcare to be significantly behind this level. However, the drivers, the challenges, and hence the opportunities, for both brand owners and investors are the same.”
Echoing Nicola’s comments, Keith Garrity, Ceuta International’s director of international development, told delegates that outsourcing could assist companies “against the backdrop of a dynamic and disruptive global marketplace, which is delivering many financial and challenging implications”.
“Outsourcing is not just about cost reduction,” Garrity pointed out, “but allowing companies to gain expertise, additional intellectual property, value-added services, and flexibility, leading to an enhanced positive outcome.”
"Outsource provision should bring agility and cost efficiencies to brands."
“From optimising a brand portfolio, to breaking into new markets or trade channels; from managing and developing brands, to turning a great product idea into a great commercial launch, outsource provision should bring agility, and cost efficiencies to brands,” he argued.
Ceuta International was seeing a “significant uptake” in brand fostering among a number of consumer healthcare players, Garrity noted, with outsourcing provision becoming a “key element in business strategies”.