Consumer Groups' Health Drive Comes At A Cost

By Breakingviews

Over-the-counter drugs could pose health risks for investors in consumer groups. Germany’s Merck (OTCPK:MKGAF) has invited bids for its Seven Seas vitamins unit, while Pfizer (PFE) is selling its more consumer-focused business. Nestlé (OTCPK:NSRGY) and rivals see opportunities to apply their sharper marketing skills. But pumped-up valuations suggest the health drive will be expensive.

With consumer companies seeking remedies for sluggish growth, it’s a good time for global pharma groups to offload their non-core businesses. Merck announced in September that it would sell the division that makes Vivera probiotics and Seven Seas, the vitamin supplement brand it acquired in 1996. U.S. drugmaker Pfizer is also looking to sell its over-the-counter business, which includes Advil painkillers.

The reshuffle represents an admission by drugmakers that they have overstretched by peddling lip balm and indigestion remedies. Merck reckons its consumer health business needs investment that it would rather deploy elsewhere. The 12-billion euro group plans to use any proceeds to strengthen its treatments for tumours and other general medicine offerings. With heavyweights GlaxoSmithKline (GSK), Johnson & Johnson (JNJ) and Reckitt Benckiser (OTCPK:RBGLY) all among potential bidders, it’s a seller's market. Mooted price tags of $4.8 billion for the Merck business and $15 billion for Pfizer’s unit imply valuations of 4-5 times last year’s sales.

Consumer companies can only justify paying those prices if they are confident they can do a better job with pharma industry castoffs. They have greater experience of selling directly to retailers and are more skilled at advertising drugs directly to consumers; pharma groups tend to focus their marketing energies on the physicians who write prescriptions. Companies like Reckitt, which currently makes over half its sales from consumer healthcare brands such as Nurofen, would also look to boost profitability. The group’s 28 percent operating margin trumps the low-20s that analysts reckon pharma companies squeeze from their over-the-counter offerings.

The global market for over-the-counter health goods will be worth 171 billion euros by 2025, according to Merck, with ageing populations and a trend towards online self-diagnosis driving annual growth of 5 percent. While that is the kind of growth supplement consumer giants need, it won’t come cheap.