Food and pharma are jockeying to be on the right side of consumer health consolidation

GSK’s consumer healthcare business, Haleon, will be one of the largest new stock market listings in Europe for over a decade when it trades on the London market in July. It represents the combined consumer health assets of Novartis, Pfizer and GSK, and has grown its sales from £4bn in 2014 to just under £10bn in 2021.

There have been some disposals along the way, most notably the 2014 sale of Lucozade and Ribena, and the sale of Horlicks to Unilever in 2020. But today, Haleon is the global leader in four of its five categories, including vitamins, minerals and supplements (VMS), pain relief, respiratory health and digestive health. Its big brands are Centrum, Panadol, Advil, Voltaren, Theraflu and Otrivin. The exception is oral health, in which it is number three, but it is the global leader in therapeutic oral health with its Sensodyne brand. Sensodyne has been a very strong performer, growing double digits since 2011 to now account for more than 10% of Haleon’s sales.

How fast can the consumer health category grow? We assume growth in a 3% to 4% range. Within this, some subcategories (such as OTC) typically grow slower and others (such as VMS) typically grow faster. Haleon aims to beat the category, targeting annual growth of 4% to 6%. There is less debate on the attractiveness of consumer health margins, which compare favourably to the wider consumer staples category due to high levels of loyalty and low levels of private label, which means it is generally a category with good pricing power.

Consumer health is also one of the most fragmented categories still left across consumer staples. The top 10 nutrition/VMS players globally represent less than a quarter of the global market, with the rest made up of small and local competitors. We expect the industry to look very different in five years’ time.

Unilever tried to start the firing gun of consumer health consolidation by offering £50bn for Haleon in January 2022, but walked away after a chorus of shareholder disapproval around the size and timing of such a transaction. Despite this setback, Unilever still has ambitions to treble its functional nutrition sales. It’s more likely to get there in a series of smaller deals rather than a single transformational acquisition. It is also under even more scrutiny around its portfolio evolution following the appointment of activist Nelson Peltz to its board in recent weeks.

However, it was not only Unilever that was interested in acquiring Haleon. Bloomberg reported Nestlé was also floating the idea of teaming up with Reckitt to bid for Haleon around the same time as Unilever. However, the idea was quickly dropped given the complexity and the preference of GSK’s management to list on the stock market rather than sell the business.

What this demonstrates is that Nestlé also has big ambitions in consumer health or, in Nestlé’s parlance, health sciences. Its health sciences unit in recent years has trebled its sales to CHF6bn following the acquisition of Bountiful, the US leader in vitamins and supplements.

The other interesting element is that other pharma companies are also reappraising their consumer health assets. Johnson & Johnson has said it also plans to spin out its consumer health business in the second half of 2023. It is a large business, with sales of $15bn and mid-20s EBIT margins, including brands such as Neutrogena, Tylenol and Listerine among others.

The consumer health market reminds us of the alcoholic beverage market 20 years ago, which has undergone significant consolidation. We think the same is likely here. Both the food and pharma companies are jockeying for position to end up on the right side of this consolidation.