From fragmented to consolidated: Implications for the over-the-counter (OTC) medicines’ market
By Vanessa Ferreira, Senior Manager, Deloitte Consulting
An over the counter (OTC) medicines’ market enables patients to access much-needed treatments without prescriptions in a safe, effective, and convenient way. OTC medicines include cough and cold remedies, pain medication, digestive health medicines and much more. The global market size is around US$ 190 billion per year and is expected to grow by five per cent per year.1 This exciting and fast growing industry attracts a large number of companies with the top five companies collectively holding only 16 per cent of the global (OTC) market, while the top ten have 27 per cent market share.2,3 This market fragmentation means that these statistics often lead to a discussion on the prospect of industry consolidation. As a M&A expert on OTC deal execution, I am beginning to see the early signs of consolidation. In this blog, I explore the rational for consolidation, the underlying assumptions that drive the consolidation hypothesis, the factors motivating companies to consider consolidation, and the strategic implications for companies operating within the OTC market.
Why consolidate and what are the assumptions underpinning the consolidation hypothesis?
In economic terms, consolidation is the process by which industries that operate with a high number of players with minimal market share move towards fewer players with increased market share. The process by which the consolidation occurs might involve two competitors coming together as a single firm (large-scale merger deals), large competitors acquiring smaller brands and companies (termed as “bolt-on acquisitions), and/ or competitors leaving the market due to lack of competitiveness.
The consolidation curve, published by the Harvard Business Review in 2002, demonstrated that most new industries are fragmented and consolidate as they mature.4 My economic training, albeit some years ago, taught me that undifferentiated products do not command premium prices, and instead require scaled adoption to maintain profitability. Certain segments of the OTC industry are well established with key products having been around for decades and fit this undifferentiated criterion – paracetamol, for example, is a late 1800’s invention.5 If we follow standard economic logic, it would be fair to assume, due to the long history of the OTC industry, that consolidation should have happened in the past.
However, the rules of the game are evolving as government regulations, technology developments and shifting consumer expectations are resetting the competitive landscape. Moreover, the OTC industry is moving ‘beyond the pill’, incorporating products and services that cater for the growing needs of empowered consumer and utilising technology to personalise solutions aimed at proactive prevention.6 While industry players are moving at pace to innovate in response to these trends, new competitors are also coming to the market with differentiate products and services (distinctive products or services with unique features or selling proposition), resetting the industry competitive field.7 This new industry paradigm is thus one of diluted market shares, due to more competitors and reduced market concentration: a trigger for a potential new wave of consolidation.8
Why the OTC-pharma relationship is adding fuel to the consolidation trend
The OTC competitive field is composed of traditional multi-national and local pharma companies with OTC operations as well as specialised OTC companies. Historically, there were scale benefits and synergies to having both prescription (Rx) and OTC units in a pharma company. This strategy enabled them to share supply chains and customers, for example, pharmacies, and other primary care outlets. However, the OTC sector, in response to consumer demands and technology developments, is moving away from these traditional commercial synergies and evolving into a consumer-centric business model characterised by digital channels and e-commerce. In response, some pharma companies, such as GSK and J&J, have opted to carve-out their consumer health business units – Haleon and Kenvue respectively which are now listed independently.9 There are expectations that other pharma companies will follow suit, with Sanofi recently announcing plans to spin out its consumer health unit and refocus the company’s research and development (R&D) work.10
As independent businesses, in this new industry landscape, these and other spin-off companies have additional incentives to search for consolidation: shareholders will continue to demand profitability levels in line with other consumer companies, but as noted, the scale benefits of the large pharma company are reduced. However, while investment capacity might be curtailed without the support of the parent balance sheet and resources, the OTC segment will no longer be subject to internal competition with Rx products. Achieving scale gains through mergers and acquisitions to increase market share provides a potential lever to increase profitability, otherwise it could become more challenging for spin-off companies to fund the necessary innovation required to compete.11
Aware of the need of spin-off companies to increase scale and the potential for consolidation, other players in the OTC market might pre-emptively move towards mergers and/or acquisitions to also increase scale and position themselves to compete effectively. This will, in turn, add even more fuel to the consolidation trend.
Does ‘bigger’ equal scale synergies?
Before M&A teams start experiencing ‘deal fever’ and CEOs are plagued by the psychology trap of ‘bigger is better’, it is important to consider the role of regulators who act at both a national and local market level. In this context, product mixes have evolved quite differently to cater for the local requirements, and companies have ended up with a diversified portfolio of brands, formulas, and geographic footprint, causing difficulties in implementing company-wide scale gains. Therefore, a detailed assessment will be needed to define in which areas of the value chain and in what context the potential gains of M&A might be delivered. Adequate investment and lead-time in line with required regulatory approvals should be considered to properly define each M&A deal value assumption and synergy plan.
Strategic implications: considerations for building a M&A strategy
Companies operating in this market can benefit from the consolidation trend by seizing low hanging fruits through bolt-on M&As while pursuing large-scale endeavours, using a clear strategy and approach. They should:
- make a deliberate choice with the consumer of the future in mind as to which categories and/or geographies to target scale and which to target niche? These strategies can co-exist across the portfolio, but stuck in the middle is never the answer
- plan for M&A as a key pillar of your strategy by weighing, consistently, the prospect of building internally versus buying external opportunities. Avoid the common bias of inward looking – ‘we do it better here’
- when analysing potential targets, consider the full value chain as the scale synergies are not restricted to products and services but could also encompass customer and partnership management, R&D and other parts of the supply chain
- bear in mind the consolidation curve and that acquisition targets might be pursued by several competitors, with potential escalating valuations. Map opportunities and engage early-on to avoid ‘bidding wars’.
Conclusion
The current OTC industry scenario indicates a potential wave of industry consolidation with players pursuing either merger and/ or bolt-on acquisitions. Companies which target M&A in a programmatic way to properly assess and value the opportunities and complexities, while targeting the scale synergies’ your company is best positioned to leverage will be the most likely to succeed.
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[1] https://www.statista.com/outlook/hmo/otc-pharmaceuticals/worldwide
[2] https://www.reuters.com/business/healthcare-pharmaceuticals/gsk-spinoff-haleon-forecasts-4-6-revenue-growth-2023-2023-03-02/
[3] https://www.iqvia.com/blogs/2022/10/consumer-health-industry-poised-for-further-acceleration-in-the-post-covid-environment
[4] https://hbr.org/2002/12/the-consolidation-curve
[5] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8654482/
[6] https://blogs.deloitte.co.uk/health/2023/06/consumer-health-exploring-market-opportunities-and-challenges.html
[7] https://www.orientation.agency/insights/pharma-product-differentiation-approaches-types-sources
[8] https://cep.lse.ac.uk/pubs/download/dp1654.pdf
[9] https://www.fiercepharma.com/pharma/meet-new-boss-bayers-incoming-ceo-anderson-could-give-investors-fresh-shot-consumer-health
[10] https://www.orientation.agency/insights/pharma-product-differentiation-approaches-types-sources
[11] https://www.cnbc.com/2023/05/05/jj-spinoff-kenvue-ceo-looks-to-innovation-after-ipo.html
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