P&G Throws Weight Behind Consumer Growth After Shedding Pharma

Procter & Gamble washes its hands of prescription pharmaceuticals to focus on its consumer brands, though experts say the firm faces obstacles to growing its beauty and OTC portfolio.

CEO Bob McDonald said during an Aug. 24 conference call with analysts that the $3.1 billion deal to sell its Rx business to Warner Chilcott "enables us to put even greater emphasis and investment in our consumer health-care businesses, which includes oral care, feminine care and OTC personal health care."

With 5 percent of the $240 billion consumer health-care market, the Cincinnati-based company has room for expansion, McDonald said. He cited oral-care brands Crest and Oral-B among "very strong brands," most of which have "significant global growth opportunities."

Chief Financial Officer Jon Moeller spoke to P&G's preference for its consumer businesses over pharmaceuticals, which - despite sales of more than $1 billion for osteoporosis drug Actonel - never truly achieved the success P&G had envisioned.

"What this really gives us the ability to do is to allocate both financial and human resources to a business that is a better fit with our core competencies as a company," he said. "And with that focus, we expect over time higher growth rates from that endeavor."

P&G expects the divestiture to generate a one-time net earnings increase of roughly $1.4 billion, or about $0.44 per share. Loss of its Rx earnings and the impact of standard overheads will result in approximately $0.16 to $0.18 per share of annualized earnings dilution, the firm says, assuming the transaction closes Nov. 1.

Warner Chilcott is picking up P&G's branded drug portfolio, which brought in an estimated $2.3 billion in revenue for the year ended June 30, 2009, as well as the company's drug pipeline and the majority of P&G's 2,300 employees in the drug business.

The buyer also will inherit P&G's troubled manufacturing facilities in Puerto Rico (¹ (Also see "Alberto-Culver's Noxzema Quality Issues Traced To P&G Facility; Suit Filed" - HBW Insight, 24 Aug, 2009.)).

Sanford Bernstein analyst Ali Dibadj says he expects P&G to ramp up oral care on a global scale to compete with Colgate.

However, according to Dibadj, P&G may have already "pushed to the limit" the growth potential for its beauty segment by raising prices too high - on Olay skin-care products, for example.

Taking Rx Products OTC May Be Key

Joseph McGovern of The Atlantis Group consultancy said in an interview that since many of P&G's key consumer products are already mature U.S. brands, the firm will have to derive growth by expanding into new markets and acquiring licenses for Rx-to-OTC switch candidates.

As far as finding switch partners, "it will largely depend on what's available and who wants to make a deal," he said.

Dibadj says opportunities for OTC switch licensing are becoming harder to find. "The door is closing a bit for them since the large pharma companies now have OTC arms," allowing them to pursue switches in-house, the analyst said.

Given P&G's success in switching Prilosec, which it licenses from AstraZeneca, the company would likely be considered a dependable partner.

Although "switches are getting bigger and riskier," McGovern predicted that the increasing emphasis on consumer self-care will drive P&G to look at potential switches in categories such as cholesterol reduction, erectile dysfunction, overactive bladder and sleep disorder.

Dibadj agreed that P&G is "a good partner to have," but said he would not be surprised to see P&G seeking more full-on acquisitions of OTC brands.

Then-CEO A.G. Lafley said in December 2008 that P&G would be deemphasizing its pharma business due to regulatory challenges and the time and costs associated with bringing Rx products to market (² (Also see "P&G Beauty Hungry For Market Share, Aims To Grow On Trade-Up, Regimen Use" - HBW Insight, 22 Dec, 2008.)).

Fiscal 2009 proved challenging for P&G; consumer health-care sales fell double digits following the loss of exclusivity for Prilosec OTC (omeprazole) (³ (Also see "Procter & Gamble Aims To Recover Growth After Tough 2009" - HBW Insight, 10 Aug, 2009.)).

- Dan Schiff ( ⁴ [email protected] )