P&G's OTC Market Direction Steered By Consumers' Turn To Self-Care Solutions
This article was originally published in The Pink Sheet
Executive Summary
Firm scans health care market for OTC drug properties meeting consumers’ growing demand for non-Rx products, says CFO Jon Moeller. He says P&G is well-positioned to "brand-build" acquired assets given its distribution network in oral, personal and feminine care, and its cost-cutting capabilities.
Procter & Gamble Co. is considering additional OTC drug acquisitions not only because it can expand distribution for products while cutting manufacturing and marketing costs, but also because consumer demand is growing for nonprescription health care options, says Chief Financial Officer Jon Moeller.
At the Barclays Global Consumer Staples Conference in Boston on Sept. 6, Moeller said P&G has a “distinct, go-to-market advantage as health care consumption moves in some cases out of the prescription space into the OTC space where we have a significant distribution network.” The OTC health care market is “very attractive from a margin standpoint, from a growth standpoint, from a demographic standpoint, from a policy standpoint and we’ll look at all tools available to continue to increase our presence in that space,” he added.
P&G’s health care segment currently accounts for 12% of sales, at around $2bn annually. Its portfolio includes OTC drugs Prilosec OTC frequent heartburn treatment, the extensive Vicks line of cough/cold, decongestant pain relief and sleep aid products and Pepto Bismol upset stomach remedy; oral care lines Crest and Oral B; and dietary supplement brands Metamucil fiber products and Align probiotics.
Sales for P&G’s health care segment in its fiscal 2018, which ended June 30, grew 5% to $7.86bn, with organic sales advancing 1%. (Also see "P&G’s Leaner, Stronger Beauty Business Drives 10% Growth" - HBW Insight, 31 Jul, 2018.) The Cincinnati-based firm’s other divisions include fabric and home care – 32% of sales; baby, feminine and family care – 27%; beauty – 19%; and grooming – 10%.
P&G Sees Chance To 'Brand Build'
Barclay analyst Lauren Lieberman led the conference discussion with Moeller and pointed out that the OTC and supplements categories are in an “increasingly competitive phase.” She asked how P&G can distinguish its products from competitors' offerings. “In today’s day and age versus 10 years ago, why is consumer health still so interesting as an area to pursue more proactively?” Lieberman said.
Moeller said that in addition to sales from growing demand for OTC over Rx health care solutions, P&G expects to grow its consumer health revenues by capitalizing on its experience with marketing brands. He said that currently, he sees “a relative lack of true consumer brand-building acumen that’s brought to bear on many” consumer health lines.
Additionally, P&G's operations create cost-synergies the firm can extend to more assets. “You think about the cost of media purchasing, which we can reduce by you name it, 15% to 25%. So those are the reasons that we feel that we can acquire when it makes sense and be value accretive in the process,” Moeller said.
50% Consumer Business Expansion Pending From Merck Deal
Moller assessed the sector as P&G works to close its $4.2bn acquisition of Merck KGaA’s consumer health business which will expand its health care product portfolio – which comprises OTC products and supplements brands – by 50%. Announced in April, the deal will add OTC drugs Kytta topical pain relief, Sedalmerck analgesic and Nasivin decongestant, as well as vitamin and supplement brands Bion, Femibion, Sangobian, Seven Seas and others. (Also see "P&G Adds Merck's Brands, Expands Consumer Health Categories, Footprint" - Pink Sheet, 19 Apr, 2018.)
When the acquisition was announced, P&G CEO David Taylor said consumer health also will continue to be an attractive category driven in part by an aging population, with the number of seniors more than tripling by 2050.
P&G got the go-ahead to acquire the firm from the European Commission's antitrust office Aug. 28 and to acquire a controlling stake in Merck's Indian consumer health business, which is incorporated separately, on Aug. 8. US regulators' decision on whether the acquisition would create unfair market advantages for P&G is expected by the end of the year.
Many consumer health companies are seeking opportunities in the OTC drug and dietary supplement sectors to capitalize off growing consumer interest in self-care, using non-drug options and wellness practices for common ailments to avoid health care costs and use of pharmaceuticals with potential unwelcome side effects. (Also see "Climb In Consumer Self-Care, Slide In Rx Margin Boost Front-Of-Store Pharmacy Sales" - Pink Sheet, 18 Feb, 2015.)
Pharmacists’ input and on-shelf other in-store communications are important sources of information to guide self-care practices. P&G is among a number of firms that have pioneered using mobile digital apps or partnering with health care providers to help consumers self-select OTC products or chose health care services.
(Also see "Technology Gap Separates OTC Drug Firms From Self-Care Sales Growth" - Pink Sheet, 16 Mar, 2017.)
P&G previously competed in the Rx arena but sold its portfolio in 2009 for $3.1bn to Irish drug firm Warner Chilcott PLC and focused its resources on its OTC drug, beauty and home care units. (Also see "P&G Throws Weight Behind Consumer Growth After Shedding Pharma" - Pink Sheet, 31 Aug, 2009.)
From the editors of the Tan Sheet.