Reckitt Benckiser looks to core of 'health, hygiene and home'

Next week shareholders in RB - the former Reckitt Benckiser - will vote on ending the household group's dependency on its opiate substitute business.

They are expected to back chief executive Rakesh Kapoor's proposal to demerge the pharmaceutical division, which had long boosted the group's growth and profits.

"It's always very positive to see a company focusing on its core business. Pharma results were very volatile so this should increase visibility on future earnings," says Hermine de Bentzmann, analyst at Raymond James.

Since replacing long-time chief Bart Becht three years ago, Mr Kapoor's mantra has been "health, hygiene and home", an umbrella term aimed at unifying the group's hotch-potch of brands and businesses, which range from French's Mustard to Durex condoms, Nurofen painkillers and Cillit Bang household cleaners.

But the area in which Mr Kapoor seeks to make his mark is consumer health - over-the-counter medicines such as its Mucinex cough remedies, Gaviscon indigestion medicine as well as Durex and Strepsils throat lozenges.

"We are creating a new force in consumer health," said Mr Kapoor this year. "This ambition is firmly embedded throughout the organisation. We are allocating significant resources to consumer health in terms of capabilities, R&D, brand equity investment and innovation."

While consumer healthcare does not have the enviable profit margins that Suboxone once boasted, it is RB's fastest-growing business, with like-for-like sales up 11 per cent last year, compared with 2012, while pharmaceutical sales fell 8 per cent. Margins, estimated by analysts at 30 per cent, are also much higher than in RB's other businesses.

Mr Kapoor sees an opportunity to consolidate both through M&A and organically in a highly-fragmented market. The top 10 companies control just 24 per cent of the consumer health sector.

He spent $1.4bn on Schiff Nutrition vitamins in 2012 and a much smaller, undisclosed amount to acquire K-Y lubricants.

But dreams of shifting up a gear with a far bigger acquisition were shattered this year when RB dropped out of the auction for Merck's consumer health unit as the bidding soared.

Germany's Bayer paid $14.2bn for the business, initially valued at up to $10bn. RB had coveted its Claritin hay fever remedies and the US rights to Dr Scholl footcare products. RB already owns Dr Scholl outside the US and was keen to unite the brand worldwide.

James Targett, analyst at Berenberg, says: "Acquisitions will play a large part but the price tag has gone up and returns have come down, so beefing up in consumer health is likely to impact returns medium-term."

Nevertheless, Mr Kapoor believes RB has an advantage over the pharma companies that dominate consumer healthcare. He argues that their focus is on molecules rather than consumers and on "big, bold advances" in medicine, rather than the incremental changes to brands that for fast-moving consumer goods count as innovation.

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As he likes to say: "Innovation in consumer health means considering mums not molecules."

Most analysts agree that RB is very good at this kind of innovation. Andrew Wood of Bernstein Research says RB's consumer-focused edge is the reason that its consumer health business has grown at nearly twice the rate of the market for the last 6-8 years.

Eva Quiroga, analyst at UBS says: "For RB, the consumer is at the core, which has framed the way they look at OTC. Take Gaviscon, which had originally been in a big bottle. An important consumer-enhancing innovation was to produce it in a small sachet that you can slip into your purse and take on the go."

But the focus on consumer health rubs against RB's parallel aim to increase exposure to emerging markets, at least in the short term. This is because OTC is easier to expand in some developed markets, where medicines can be sold in supermarkets.

Pharma companies are also becoming more formidable competitors after two large M&A deals this year. Not only did Bayer acquire the Merck assets, but GlaxoSmithKline and Novartis agreed to pool their consumer healthcare assets into a joint venture.

The joint venture will be the world's biggest consumer healthcare business and is headed by a former executive from L'Oreal, the French cosmetics group.

Emma Walmsley, who was hired by GSK from L'Oreal in 2010, told the Financial Times there were "significant competitive advantages to having a pharmaceutical and consumer healthcare business as part of one group . . . where consumers regularly use and trust our pharmaceutical products, research shows this translates into loyalty toward our consumer healthcare brands."

There is a growing threat too from private label, especially in the US where it accounts for 30 per cent of the OTC market, compared with 10 per cent in home and personal care, according to Berenberg.

RB is mired in the same problem facing most consumer goods companies - slowing emerging markets and lacklustre demand in developed countries - which led Mr Kapoor in October to forecast sales growth this year "at the lower end" of its 4-5 per cent range.

He could yet be obliged to clean up the portfolio further, by selling off the food business - mainly mustard - and more radically, the slow-growth home division, which includes Vanish stain remover and the underperforming Airwick freshener business.

But for now Mr Kapoor's focus is on ensuring the pharma business begins its new life two days before Christmas, when it is due to trade as Indivior, assuming shareholders approve the spin-off.

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