Consumer and pharma groups swap assets

Reckitt Benckiser's planned spin-off of its pharmaceuticals division adds to a dizzying range of deals in the pharmaceuticals and consumer healthcare sectors this year as groups look to boost shareholder value by ramping up their strongest businesses and exiting weaker ones.

Much of the investor focus has been on megadeals among drugmakers, particularly US companies shopping for a lower tax rate in Europe. However, Reckitt's proposed divestment of its pharmaceuticals unit points to another fundamental trend.

Consumer goods companies have been divesting non-core assets and beefing up areas of strength in an attempt to increase growth. Big pharmaceutical groups are reassessing their portfolios as they face shrinking drug pipelines, increased competition from generics and patent expiries.

For Reckitt, this involved Monday's decision to exit pharmaceuticals and focus on consumer healthcare. Nestle, Unilever and Reckitt have all been pushing further into personal care products such toothpaste and shampoo and into healthcare, which tend to have higher profit margins than food and home care products.

By contrast, Merck of the US moved in the opposite direction in May by selling its consumer division to Bayer of Germany for $14.2bn so it could concentrate on its core drugs business.

It would be easy to draw the conclusion that pharmaceuticals and consumer healthcare are decoupling but that would be an oversimplification. Bayer, after all, is a drugmaker.

Nevertheless, Rakesh Kapoor, Reckitt's chief executive, regards over-the-counter medicines as a sector better suited to consumer-oriented groups that have a competitive advantage in branding and understanding consumers. Hence his decision to spin off the group's prescription-based heroin substitute division.

"Consumer companies are better owners of consumer health than pharmaceutical companies," he said. "What pharma companies are brilliant at is discovering new molecules and drugs. Clearly, consumer companies don't approach this area from the point of view of molecules but from a consumer and brands perspective."

Mr Kapoor has made a big play for consumer healthcare assets, outbidding Bayer in 2012 for Schiff Nutrition, the vitamins business, only to be outbid in turn by Bayer for Merck's healthcare division.

Pfizer and Johnson & Johnson also mix pharmaceuticals with consumer products. GlaxoSmithKline, meanwhile, is in the process of forming a new joint venture with Novartis that will create one of the world's biggest consumer healthcare businesses.

Sir Andrew Witty, GSK chief executive, told the Financial Times this week that he was open to the possibility of a break-up in future but insisted that pharmaceuticals and consumer healthcare could remain fruitful bedfellows.

There were strong synergies, he said, between prescription drugs and branded OTC medicines, particularly in emerging markets, where the two categories often share the same supply chain.

Consolidation will help create barriers to entry, say analysts at HSBC: "We believe the critical importance of scale explains why a lot of M&A has been happening in OTC drugs, hygiene, home care and hair care."

The activity also says a lot about how companies in the broad consumer goods sector are differentiating themselves

Nestle's decision to take full control of Galderma - the joint venture it had owned with France's L'Oreal - in February underscored its determination to focus on science. It is becoming less dependent on traditional foods and beverages, and more committed to science-based nutrition, healthcare and the inelegantly labelled "wellness" category.

Paul Bulcke, the Swiss group's chief executive, also finds the sector attractive because of changing demographics: "We want to expand this boundary of nutrition because of societal needs: ageing [and] brain health."

But medical nutrition has proved a step too far for Danone, the French owner of Evian water and Activia yoghurts. It is in talks with Hospira, a US pharmaceutical business, about the sale of its medical nutrition unit, which was acquired in 2007 as part of its purchase of Netherlands-based Royal Numico for €12.3bn.

The French group believed Numico's infant nutrition business fitted neatly with its consumer brands. But the medical nutrition unit, which includes specialised food to delay the onset of specific diseases and tube-feeding for use in hospitals, did not.

"The tube feeding business in particular has few synergies with the rest of the group," says Alex Howson, an analyst at Jefferies. "It has little to do with consumer goods and branding. It is a completely different ball game"

For pharmaceutical companies, divestments such as Merck's consumer healthcare sale reflect pressure to streamline as the industry struggles to revive its fortunes after a long period of sluggish growth. Pfizer spun off its Zoetis animal health unit last year. Novartis, meanwhile, in April traded its vaccines business for GSK's oncology unit in a deal that also saw the pair pool their consumer health assets in a new joint venture. The Swiss group also sold its animal health unit to Eli Lilly.

Some of these deals, such as the spin-off last year of AbbVie, the former pharmaceuticals arm of Abbott Laboratories, divestments have unlocked value from businesses with different growth and risk profiles.

The sharp increase in AbbVie's value since the spin-off gave it the firepower to make its own contribution to the healthcare merry-go-round this month through its £32bn takeover of UK-listed Shire.

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