How healthy is Consumer Health?

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Many large Pharma companies, such as GSK, Novartis and Sanofi, run Consumer Healthcare businesses.

They specialise in different areas, selling products as diverse as toothpaste, skin care and cold treatments. These products are lower margin than branded Pharma drugs (20% EBIT margins are typical, with margins from the Pharma business being as high as 40%) but they are stabler, as patents are not an issue. For example, GSK sells Sensodyne toothpaste, which nets >$1bn a year. R&D costs are also much lower, at 3-5% of sales, vs 20% for Pharma divisions. In short, they are attractive businesses and help to stabilise the volatile revenues of purely Pharma companies.

Consumer slowdown?

Historically, consumer businesses have grown at 3-5% p.a., but this year has been different.

The Consumer Healthcare divisions of some Pharma companies have seen sales declines. At the same time, several companies are looking to sell their consumer divisions such as Pfizer and Merck.

Should Consumer be in Pharma companies at all?

Some argue that Pharma run Consumer Healthcare businesses inefficiently: they spend too much on R&D. They’re also not ruthless enough in controlling costs. For instance, Reckitt Benckiser, a pure Consumer Business, generates sales at a much high margin. If Consumer Healthcare businesses were run by firms like Reckitt, they could generate greater shareholder value. With several Pharma companies lining up to sell their Consumer Healthcare divisions, it would seem that many in the Pharma industry agree.

 

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