Will pharma's exodus from consumer health continue into 2019? It sure looks that way

The year 2018 might be remembered by the pharma world for a deluge of consumer health castoffs. And one doesn’t really need a crystal ball to see the trend continue into the near future as drugmakers turn their focus to higher-margin, innovative medicines.

Novartis, Merck KGaA, Bristol-Myers Squibb, Bayer and Pfizer each sold off all or pieces of their consumer franchises in 2018—and more deals are expected in the future, with Bayer and GlaxoSmithKline each expected to make additional divestment moves.  

It started off with Novartis handing its stake in a consumer joint venture formed in 2015 with GlaxoSmithKline to the British pharma for $13 billion and culminated with GSK forming another consumer JV with Pfizer—only as a prelude to an eventual spinoff that'll separate the business in three years.

The Novartis-GSK transaction came as a bit of a surprise to some, as then-Bernstein analyst Tim Anderson had reported only a few months before that outgoing CEO Joe Jimenez and successor Vas Narasimhan had told him they’d like to give the venture a few more years to grow in value before punting the company's stake to GSK.

Clearly, Narasimhan’s intentions changed. Soon after taking the reins, he announced plans to focus the Swiss drugmaker as a "medicines company." That meant the consumer franchise needed to go, and the time was "right for Novartis to divest a non-core asset at an attractive price," the Novartis chief said in a statement.

Instead, the company is now allocating capital to bolt-on acquisitions in the innovative drug field. Just days after the consumer announcement, Novartis picked up AveXis for $8.7 billion for a spot in the hot-and-new gene therapy arena. The pharma giant says its lead candidate, AVXS-101, could potentially be a better option than Biogen’s Spinraza for spinal muscular atrophy patients. Later in October, Novartis put down another $2.1 billion for radiopharmaceutical player Endocyte.

For GSK, the Novartis deal served as a harbinger of a large consumer merger with Pfizer and a spinoff down the line.

RELATED: GSK, Pfizer go for radical makeovers with giant consumer combo destined for spinoff

After walking away from a chance to buy up Pfizer's consumer business, citing a risk that it would "compromise our priorities for capital allocation," as CEO Emma Walmsley put it at the time, GSK returned in December with an all-equity transaction to combine the two pharmas' consumer portfolios into a new JV that will take GSK's name.

Yet with a leading 7.3% share of the market, well ahead of competitors Johnson & Johnson, Sanofi and Bayer, and a combined $12.7 billion in sales by 2017 numbers, the scale of the combined business put it in line for a spinoff. GSK will split up to focus on pharmaceuticals and vaccines within three years, Walmsley said, providing music to investors' ears. The consumer business will then become a separate shop and be listed on the London market. The move could free up cash for GSK to invest further in pharma R&D, a top priority Walmsley outlined soon after she took over.

GSK had already agreed to sell GSK's Indian consumer business to Unilever for £3.1 billion ($3.9 billion). As Novartis did, it'll plow some of the sale proceeds into pharma deals, such as the one it recently struck for cancer-focused Tesaro for $5.1 billion. 

Concurrently with the GSK-Pfizer announcement, Bristol-Myers Squibb said it had found its French OTC business, Upsa, a buyer in Japan's Taisho Pharmaceutical. Just like deals did for its Big Pharma peers, the $1.6 billion deal will free up some cash for BMS, which said it will use the money to "further refine its portfolio to focus on transformational medicines for patients facing serious diseases." Those include lung cancer, a lucrative area BMS is looking to expand in with immuno-oncology duo Opdivo and Yervoy.

Perhaps a less-expected intent-to-sell announcement came from Bayer in 2018, although industry watchers had been buzzing about a selloff of some sort amid concerns that the German conglomerate's pharma pipeline couldn't pull off enough long-term growth. 

As part of a major restructuring that involves a "comprehensive range of portfolio, efficiency and structural measures," announced in late November, the company is getting rid of sun care line Coppertone and foot care products Dr. Scholl’s, which it said "have more favorable development potential outside of Bayer."

Bayer picked up both brands in its $14 billion acquisition of Merck & Co.’s consumer portfolio just four years ago. But both brands have been struggling. Coppertone, in particular, posted the largest drop through the first nine months of 2018, and as Bernstein analysts observed in a Dec. 15 note to clients, the line has seen sales declines and market share losses for four straight years.

Bayer recently announced a €2.7 billion ($3.1 billion) impairment from the Merck acquisition, the analysts noted. "This implies that the business has been very poorly run since acquisition, or Bayer overpaid for this asset (21.0x EBITDA and 6.5x sales) … or probably both!"

Prior to the release, Bayer had already sold its prescription dermatology business, which was also managed under its consumer umbrella. The franchise, which delivered €280 million ($328 million) in 2017 sales, was sold to Leo Pharma for an undisclosed amount. Bernstein analysts figured the two dermatology brands together could be worth around €950 million, assuming a 2.5 multiple on sales.

Meanwhile, in a €3.4 billion ($4.2 billion) deal with Proctor & Gamble in April, Merck KGaA also sold its consumer health business, which the German company’s healthcare CEO, Belén Garijo, said was facing "increasing internal constraints to fund […] to reach the required scale." For Merck, the deal was also a manifestation of its shift toward becoming "a leading science and technology company."

Why the mass exit? Drugmakers may foresee the OTC landscape getting a little bit thornier thanks to a certain e-commerce giant. 2018's deals—or talk of them—happened just as Amazon formed a venture with J.P. Morgan and Berkshire Hathaway to tamp down flying drug costs. Before that, it began selling OTC products online, and in June it purchased independent pharmacy PillPack. Amazon's entry could put the heat on drugstores, which could in turn pile pressure onto OTC drugmakers.

But amid the flurry of consumer health deals, two major Big Pharma consumer players stood out as outliers. First, there’s Sanofi, which has gone radio silent on the front—understandable, given that it just came off a consumer acquisition through an asset swap with Boehringer Ingelheim. 

Then there’s healthcare juggernaut Johnson & Johnson, which interestingly went against industry trend in 2018. Instead of selling off, it agreed to pay 230 billion Japanese yen ($2.0 billion) in cash to acquire the remaining share of Japanese cosmetics and skincare specialist Ci:z. The move gave J&J popular medical cosmetic products Dr.Ci:Labo, Labo Labo and Genomer and additional heft in Japan and other Asian markets. Moreover, instead of distancing consumer from pharma, in June J&J put the two units under one leader, former pharma chief Joaquin Duato.

J&J’s beauty brands have recently come to the rescue as its baby care franchise weighs on the overall consumer health unit, what with ongoing litigation against its talc powder. The company’s stock price tumbled by more than 10% on Dec. 14 after Reuters reported that the drugmaker knew for decades that the powder contained cancer-causing asbestos.

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