Frequent M&A Keeps Competitors at Bay: OTC Industry Changes (Part 1)

LS International

Birth of the consumer healthcare industry

The global consumer healthcare industry is a great example of consolidation shaping the evolution of the sector. Current players come from the pharmaceuticals & life sciences, healthcare and consumer products sectors. They have chosen joint ventures, M&A and divestitures/divestments to generate synergies, strengthen product/brand portfolios, access new markets (geographies and adjacent spaces) etc. simply to prepare for what each of these companies see as their future.

The wave of consolidation gathered momentum in the past decade for several reasons. Probably the most important factor was the blurring of boundaries between the OTC (over-the-counter) pharmaceuticals/healthcare and consumer products industries. The “consumer healthcare” market is generally seen to comprise analgesics; allergies, cold, sinus and flu; dermatological products; gastrointestinal solutions; and nutritionals. Euromonitor estimates retail sales in 2017 to be $233.2 billion- by no means insignificant. This is why so many global companies remain keen on getting a piece of the action.

How consolidation is shaping the consumer healthcare industry

For most top pharmaceutical companies, the era of blockbuster molecules has perhaps all but ended, thanks to more expensive R&D (given the advent of biosimilars, genetics based personalized medicine etc.), more stringent clinical trial regimes, and insurance companies and regulators exerting greater influence on prices. For most of these companies, which are originally from the USA, UK, Germany or France, the growing demand for generic drugs (manufactured by overseas players) in their own backyards put further pressure on top lines. In response, many companies have sold off divisions, choosing to focus on non-prescription, OTC products or specialty chemicals or just in one therapeutic area.

But this process too hit regulatory hurdles, with some companies forced to sell individual brands or product portfolios to comply with anti-trust regulations aimed at preventing market dominance. For example, Teva was required by the US FTC to divest 75 generic drugs as a condition for its acquisition of Allergan’s generics business (the largest anti-trust mandated divestiture in the history of the pharmaceuticals industry). This was another driver of M&A that helped create today’s consumer healthcare landscape.

Simultaneously, food and beverage companies also sought to enter this lucrative space, leveraging their own proximity to consumers. Danone acquired baby-food maker Numico in 2007, while Nestle acquired Pfizer’s baby-formula unit in 2012. These moves were responses to new opportunities emerging as a result of changing demographics. For example, ageing populations, increasing health consciousness, rising incomes as well as greater awareness of the need for special nutritional supplements for infants, women, athletes etc. have all contributed to rapid growth in both traditional and new geographies. Nestle is looking at sports nutrition and weight management products, which are high-growth niches within the consumer healthcare market. Companies like Coca Cola and Pepsico too are looking at healthy beverages and snacks.

As consumers began to rely on advice from their healthcare advisers on what nutraceuticals, cosmeceuticals and OTC products to use, these products began to be sold by pharmacies/drugstores as well as conventional retailers (and increasingly, by online retailers). This shift has required marketers to invest in building brands with high recall and manufacturers to put in place robust, reliable and extensive distribution networks. As these are assets that cannot be created easily, cheaply or quickly, M&A offered a quick, efficient and effective option. Reckitt Benckiser started to gain a toehold in the consumer healthcare area after acquiring SSL International Plc (makers of Durex condoms) in 2010. Most recently they have increased their footprint even more in the baby food segment by acquiring the Mead Johnson Nutrition Company earlier in 2017. This niche is seen to offer high growth in countries like China, where the one child rule was recently revoked. In 2011, P&G and Teva formed PGT Healthcare, a joint venture that has access to manufacturing capabilities, brands and distribution networks.

As newer paradigms emerge in treating various diseases and disorders, companies began to evaluate their core competencies and refocus on specific areas that played to their strengths. Pfizer chose to exit its consumer business by selling it to Johnson & Johnson in 2006. But it acquired a new portfolio through its acquisition of Wyeth in 2009. In 2013, Pfizer divested its animal health business to form Zoetis. In 2014, as part of its strategy to become the world’s second largest OTC company, Bayer acquired Merck’s OTC division for $14.2 billion.

Earlier this year, Sanofi and Boehringer Ingelheim successfully concluded a transaction in which the former’s animal health business (“Merial”) was transferred to the latter in exchange for BI’s consumer healthcare (“CHC”) business. Consequent to this strategic restructuring, the BI-Merial combine will focus on building leadership in the animal health products space, while Merck will integrate BI’s CHC team and build that business. Also in 2017, cosmetics giant L’Oreal SA announced its decision to acquire three skincare brands from Valeant Pharmaceuticals for $1.3 billion. Valeant is also selling its Dendron anti-cancer business to Sanpower for $820 million. Merck KGaA is reportedly considering a sale of its consumer healthcare business. Recently, Pfizer’s CEO has stated that the company is open to divesting its consumer business. Nestle, J&J, GSK, Bayer and Sanofi are all potential buyers of Pfizer’s business or individual brands.

Clearly, the industry is in a state of flux, with moves and countermoves being made by players with diverse origins. And with technology enabling disintermediation, changing consumer behaviour and preferences and shaping healthcare and retailing experiences, it is very likely that significant disruptions lie ahead for companies and consumers… but that’s for another time.

Please look out for part 2 which will address online retail and what the effect will be for consumers.