P&G outlines its profit plan: stick to personal care, health products

NEW YORK Last week during an analyst presentation, Procter & Gamble outlined its strategies to maintain a 3 percent growth rate going forward—pull away from businesses like pharmaceuticals that represent declining margin opportunities and re-double efforts in continuing growth across margin-friendly businesses like personal healthcare.

“The fear of recession in the U.S. has turned into acknowledgment that we’re actually in a recession,” A.G. Lafley, chairman and chief executive officer of P&G, told analysts attending the conference. “Unemployment is rising while investments and retirement accounts continue to decline. Food costs are rising around the world, especially in the developing world and real wages are dropping. Home sales and home prices are down. Auto sales are down. Retail sales are down,” he said. “But the picture isn’t nearly as bleak in fast-moving consumer goods. … In our categories, market growth rates are slowing but still growing in the absolute on both a unit and a value basis.”

P&G announced it has frozen any research and development across its pharmaceutical market, and will even entertain divesting those products in the coming year.

“We will now focus R&D and our licensing and acquisition resources on building consumer healthcare businesses, oral care and feminine care and, of course, personal healthcare,” Lafley said. “Our objective going forward is to maximize the value of our four key pharma brands—Actonel, Asacol, Enablex and Intrinsa. We intend to manage them throughout each brand’s natural life cycle. However, we will also consider the divestiture of some or all of these brands.”

In today’s environment, pharmaceutical businesses deliver lower returns for shareholders than they did when P&G invested heavily in this sector earlier in the decade, Lafley noted. “The regulatory environment is much more difficult with far greater time and costs required to develop new drugs. Asset lives are shorter as regulators grant an increasing number of generic approvals prior to patent expirations and there is significant downward pricing pressure in the pharmaceuticals market.”

In the late 1990s, pharmaceuticals traded at multiples at least 10 points higher as compared to consumer products. Today, those same companies trade in multiples at or below consumer products. “This has led to our decision to de-emphasize pharma and increase our focus on consumer healthcare, a business driven by strong brands where trends are driving growth opportunities in P&G’s core capabilities give us important competitive advantage.”

And the company plans to invest heavily across its healthcare brands—both in traditional advertising and trial-driving programs. “In tight economic times, many companies pull back on advertising as a cost cutting measure,” Lafley said. “This creates an opportunity for us to buy more media at a lower cost and to increase our brands' share of voice relative to competitors.”

Health and well-being represents approximately a $19 billion slice of the pie for P&G—which translates to about 23 percent of P&G sales and 24 percent of net earnings. Divided across two businesses—healthcare on one end and snacks and pet care on the other—health and well being is home to 11 of P&G’s 43 largest brands, including six brands with over a $1 billion in annual sales. “Our top 11 brands account for 85 percent of health and well being sales, and over 90 percent of the profits,” noted Rob Steele, P&G vice chairman of global health and well-being.

In personal healthcare, sales have grown at a strong compound average rate of about 20 percent per year over the last five years, Steele reported. This growth has been driven by four factors—a renewed global focus on growing the Vicks franchise; an increased presence in digestive health with the launch of Prilosec OTC and continued steady performance of the Pepto-Bismol and Metamucil brands; strong growth in the newly repositioned and strengthened PUR Water business; and P&G’s entry into home health diagnostics with our Swiss Precision Diagnostics joint venture.

“We really like consumer healthcare because it is a big market with over $240 billion in global retail sales,” Steele said. “It is growing fast at a 5 percent to 6 percent annual rate. It is financially attractive with very healthy margins. And it’s a very fragmented market. For perspective, the global leader in this space, J&J, has less than a 10 percent share. P&G is actually the number two player with a 5 percent share.”

P&G is currently in the process of introducing a line of probiotics that expands P&G’s presence in digestive health, Steele noted. “Align is a product that builds and maintains a person’s natural defense against digestive issues such as occasional irregularity. Align is a great complement to the Prilosec OTC, Pepto-Bismol and Metamucil digestive health brands.”