As the curtains close on a year of unprecedented consolidation in the consumer health industry, another prized asset has been snatched up. Belgium’s Omega Pharma NV, which itself was taken private just two years previously, has agreed to be acquired by the Irish-American private label powerhouse Perrigo Co Plc. While the deal’s US$4.5 billion valuation pales in comparison to the GlaxoSmithKline-Novartis joint venture (scheduled for early 2015 completion) or Bayer’s US$14.2 billion acquisition of Merck & Co Inc’s consumer division in October, it nevertheless testifies to the ongoing attractiveness of the industry and the need to diversify portfolios across geographies and categories. While Perrigo’s purchase may mark the last significant deal of 2014, consolidation in consumer health is expected to continue well beyond the New Year.
Diversifying the portfolio across categories, markets and brand types
While Perrigo’s consumer health focus has traditionally centred on manufacturing private label products for major retailers in the US, the company has been pushing to diversify its operations recently. In addition to expansion into new markets – it is a leading private label manufacturer in the UK and Mexico – Perrigo has also been investing in branded generic products. In the US, it manufacturers the diversified over-the-counter (OTC) branded generics line Good Sense, which was complimented by the company’s early 2014 acquisition of Herron in Australia and New Zealand from Aspen Pharmacare Co Ltd. To date, the company has, with a few exceptions, avoided launching national brands, opting instead to focus its resources on aggressively courting major private label buyers and an impressive new product pipeline that includes nearly 20 new drug applications and abbreviated new drug applications targeted for approval and launch through the end of the decade.
However, the Omega Pharma acquisition will immediately establish Perrigo as a major global player in branded consumer health products. In 2013, the company’s portfolio included brands across nearly every major OTC category and the Abtei vitamins and dietary supplements brand, which generated nearly US$200 million (RSP) globally. In the United Kingdom, one of Perrigo’s most important private label markets, it will now also have major brands in important categories like analgesics (Solpadeine is the second-best-selling brand), digestive remedies (Zantac is the eighth-best-selling brand) and dermatologicals (TCP is the twelfth-best-selling brand). In fact, Omega Pharma’s strength in the Western European OTC market, one Perrigo CEO Joseph Papa described as “high-barrier to entry”, was a major factor in Perrigo’s interest. In 2013, Omega Pharma was the ninth-largest branded OTC producer in Western Europe. Though the region’s OTC sales have grown rather sluggishly since 2008, with 2013 retail sales of US$23.1 billion, it is impossible to avoid for a company with aspirations of global leadership.
Omega Pharma Top Markets by Sales (US$, RSP), 2013
Source: Euromonitor International
The deal’s greatest value moving forward could be the combination of Perrigo’s substantial new product development and manufacturing capabilities with Omega Pharma’s strengths in marketing. In the US, Perrigo is a leading private label manufacturer of several categories that Omega Pharma has limited exposure to in Western Europe. The new company will be in a position to use existing Perrigo manufacturing capabilities and capacity to quickly launch products in both large, established and smaller, high-growth categories under existing Omega Pharma brands, or as new brands that complement Omega Pharma’s existing portfolio. Potential categories include proton pump inhibitors. While the category is relatively small (it generated just $79 million in 2013), it is expected to be one of the fastest-growing OTC categories in the region through 2018, posting a CAGR of over 4%. Furthermore, the 2013 EU-wide approval of esomeprazole (Pfizer’s Nexium Control) – paired with a relatively high and growing prevalence of gastro-oesophageal reflux disease in Europe – could help establish the category as a major competitor to the simpler antacid products that tend to dominate the region’s digestive remedies sales.
New competitive landscape
Perrigo’s purchase was just the latest in a string of mid-to-large size deals struck in 2014. In addition to the massive GlaxoSmithKline-Novartis joint venture, which will establish a new global consumer health market leader, and Bayer’s US$14.2 billion acquisition of Merck & Co Inc’s consumer health division (which generated nearly US$2 billion in retail value sales in 2013), a number of mid-sized deals were announced. Deals including Nestlé SA’s US$3.6 billion buyout of L’Oréal Group’s interest in their Galderma dermatologicals joint venture, Meda AB’s US$3.1 billion acquisition of Rottapharm SpA, Abbott Laboratories Inc’s US$2.9 billion acquisition of CFR Pharmaceuticals SA, and Prestige Brands Holdings Inc’s US$750 million acquisition of Insight Pharmaceuticals Corp will all further consolidate the consumer health industry.
Consumer health’s recent successes relative to other consumer packaged goods categories will likely potential buyers interested for the foreseeable future. Looking forward to 2018, global retail value sales in the consumer health industry are expected to grow by 3.4% annually, compared to 2.9% in beauty and personal care and just 2.4% for home care products. As such, Omega Pharma’s announcement in early 2014 that it was seeking a buyer led to speculation around a host of potential acquirers. In addition to Perrigo, a number of potential buyers were hinted at in press reports. While Boehringer Ingelheim GmbH eventually denounced reports of its interest and Actavis Plc may have been too busy with other potential deals (the company was rumoured to have rebuffed advances by Pfizer Inc in September and is currently rumoured to be in talks with Allergan Inc about a possible merger), one company that seemed a likely frontrunner was France’s Sanofi. While the company’s recent investments had centred on higher-growth categories, including herbal/traditional products and vitamins and dietary supplements, a Sanofi bid would have enabled it to maintain pace with the industry’s top companies. The company’s recent meteoric rise in the global rankings (from 8th in 2008 to 3rd in 2013) will be overshadowed, as the GlaxoSmithKline/Novartis and Bayer/Merck & Co deals will likely balloon the gap between Sanofi and first place by half to nearly US$4.3 billion (RSP), leaving Sanofi as more of an afterthought than potential long-term threat for the global number one spot.
Opportunities for private label in many Omega Markets
Private label products are a major constituent of Perrigo’s US consumer healthcare portfolio. After economic uncertainty and recalls of leading national brands led to considerable share gains in the past five years, private label’s growth has slowed in the last two years and is expected to decline across most major categories in 2014. Though Perrigo has launched several concerted marketing campaigns to promote private label consumer health products in the US in the recent past, a rising economic tide and increasingly consistent supplies of top brands, including Johnson & Johnson’s Tylenol and Motrin and the ongoing return of Novartis’ Theraflu, are expected to put significant pressure on private label sales, which could quickly be pushed back down to their mid-2000’s market share levels.
However, there is still great potential in markets in Omega Pharma’s Western Europe markets, where private label penetration of key OTC and VDS categories remains small. Due in part to regulations that restrict sales of many categories to the fragmented, often independently owned chemists/pharmacies channel, branded generics like Procter & Gamble’s (PGT Healthcare) Ratiopharm have traditionally performed much better than private label in Western Europe. While Perrigo certainly has the capacity and experience to help Omega Pharma launch a competitive value-brand alternative to established branded generics, private label may also benefit in the long-term from a push liberalise OTC drug distribution in major markets like France and Italy, where products must be dispensed by a pharmacist. This push could be a boon to Perrigo and Omega Pharma, in that the company would be a one-stop alternative for national brands and branded generics or private label offerings.
Private Label Market % Share (RSP) in Omega Pharma’s Top Markets, 2013
Source: Euromonitor International