Fortified OTC play to keep J&J healthy

The recent acquisition of the electrolyte brand ORSL by babycare major Johnson & Johnson (J&J) reminded those tracking the sector of another buyout - Paras Pharmaceuticals by Reckitt Benckiser (RB) four years ago. Both acquirers paid a huge sum for the targets. Paras was acquired at eight times sales (Rs 3,260 crore) by RB, while ORSL was bought at 7.5 times its Rs 100-crore turnover by J&J.

J&J, like RB, defied the common practice of picking up consumer assets for not more than two to three times their sales, to get a larger play in the over-the-counter (OTC) market. At Rs 15,000 crore, according to industry estimates, the OTC market is growing at the rate of 12-15 per cent every year.

Experts have maintained that OTC is a category of the future- that can only grow further, given the country's expanding population and its need for viable healthcare solutions. And, portfolios of fast-moving consumer goods (FMCG) and pharma companies would only flaunt more of such brands sooner than later.

The category has, in fact, grown because OTC products can be marketed the way an FMCG brand is, unlike in the case of prescription-based medicines. The ability of pushing sales makes it easier for OTC brand-owners to include such products in their portfolios.

J&J's OTC portfolio already includes Benadryl (cough syrup), Splenda (low-calorie sweetener) and Nicorette (anti-tobacco lozenges and gum). ORSL, a fruit-based electrolyte drink, used for curing mild dehydration after cough & cold and fever, will be extended into post-illness care, experts say.

"The acquisition will allow us to expand our consumer healthcare offerings," says Thibaut Mongon, company group chairman, Johnson & Johnson Family of Consumer Companies Asia Pacific.

J&J's India consumer healthcare business (of which OTC is a part) gives the company around Rs 3,000 crore in revenue. It is the biggest and most popular of its three verticals (the other two being pharma and medical devices, which together are estimated to contribute another Rs 3,000 crore) for the American major in the country.

Besides OTC, the consumer healthcare vertical includes oral and wound health (Listerine, Band-Aid, Savlon), feminine hygiene (Stayfree), babycare and beauty (Clean & Clear and Neutrogena).

While the contribution of OTC within consumer healthcare is not large for J&J, industry experts say the acquisition denotes that it is looking to ramp it up in the future. J&J's global moves point at the same, according to those who track the company.

Navroz Mahudawla, managing director and founder, Candle Partners, an investment consultant, says, "Globally, consumer healthcare is a big focus area for J&J. The acquisition they have made is in line with that focus. Secondly, the nutrition space is evolving in India. You have different product formats, from outright medical products, such as electrolytes and energy drinks, to fortified drinks promoted by beverage companies. There are a number of possibilities in terms of portfolio expansion for the company, which makes it an exciting space to be in."

The marketing of fortified drinks, for example, even though they are FMCG products, are now being rooted in science (such as Tata Gluco Plus and Tata Water Plus from the Tata-PepsiCo JV), and being positioned as strong supplements to water. J&J could soon go down that road.

After RB acquired Paras Pharma's products four years ago, it subsequently offloaded the personal care brands in the Paras portfolio such as Setwet, Zatak and Livon to Marico for Rs 600 crore. The healthcare portfolio including brands such as Moov pain balm, Krack foot cream and D'Cold rub were retained by RB, given their traction as OTC brands.

RB's global chief executive, India-born Rakesh Kapoor, has said that the healthcare segment can help the British consumer goods major make significant inroads into emerging markets such as India, where Dettol has been its key brand.

Others like GlaxoSmithKline Consumer Healthcare, Zydus (subsidiary of Cadila Pharma), Elder, part of the Elder Group (which includes Elder Pharma) and Piramal Healthcare have all increased their OTC footprint in the past few years. And, more companies are expected to join the pack in the coming years, experts say.

PLAY IN OTC AND NUTRITION

• Both J&J and RB have defied common wisdom of not paying more than two-three times of sales for an acquisition to notch up OTC brands
• Globally, consumer healthcare, of which OTC is a part, is a big focus area for J&J. In India, consumer healthcare contributes around Rs 3,000 crore to J&J
• While OTC is not yet big for it, the acquisition points to J&J's interest
• J&J has other OTC brands such as Benadryl (cough syrup), Splenda (low-calorie sweetener) and Nicorette (anti-tobacco lozenges and gum)
• ORSL will play in the nutrition space which includes electrolyte and energy drinks and fortified drinks promoted by FMCG beverage companies