Market Share Upside as P&G Sharpens Focus on OTC Drugs

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Procter & Gamble ( PG ) recently announced a joint venture with Israel-based Teva Pharmaceutical Industries, the world's largest generic drug maker, in a deal that could significantly expand both companies' consumer health care businesses. The venture combines the over-the-counter drug businesses of both the companies outside North America. PG is the largest consumer goods company in the world, and traditionally competes with companies like Unilever Group ( UL ), Revlon ( REV ) and L'Oreal ( LRLCY ) across a wide product spectrum.

About the Joint Venture

Products : The venture to be based out of Geneva, Switzerland, will merge P&G's healthcare brands (Vicks, Metamucil and Pepto-Bismol) with Teva's portfolio of over 1,500 pharmaceutical products across over-the-counter pain medicines, cold/cough drops and digestive treatments.

Operations : The venture leverages P&G's branding and retail network and combines it with Teva's expertise in drug manufacturing. The partnership transfers P&G's manufacturing operations to Teva. Teva will make the drugs and sell back to the venture earning a profit on the sale. The venture, of which P&G owns 51% and Teva owns 49%, will then market the drugs and distribute the profits proportionally.

Markets : P&G's consumer health care business draws almost 75% of its revenues from the United States. P&G has excluded its existing North American over-the-counter brands from the venture, noting that the U.S. portfolio is already 'pretty well-developed'. However, any business created in North America going forward would be part of the venture.

Why the Joint Venture Makes Sense

  • The joint venture positions P&G and Teva to leverage both the aging baby boomers demographic (those born between 1945 and 1964) and, more importantly, the coming wave of cheaper generics brought on by patent expiration for more than 10 mega drugs with combined sales of $50 billion.
  • The venture aims to sell these former patent-protected drugs as branded over-the-counter drugs, something Teva could not have managed to do on its own. P&G shall help in branding these generics manufactured by Teva and enable their distribution across the globe.
  • The size of the over-the-counter market is about $200 billion in sales. With an expanded product portfolio, both P&G and Teva are poised to corner a significant share of the consumer health care market.

How much could be the impact on P&G?

We currently estimate that consumer health care (Prilosec OTC & Vicks) makes up 6% of our $75.25 price estimate for Procter & Gamble's stock .

Our base case estimates suggest that P&G's non-prescription drug market share will decline slightly in the years ahead, off of about 5% in 2010, due to competition from small generics manufacturers. However, the joint venture shows P&G's continued focus on consumer health care and positions the company for market share upside.

Combined sales of the venture's products total over $1 billion, but could quadruple by the mid to late part of the decade. This could translate into upside for P&G's market share in over-the-counter drugs, implying potential upside to our current $75.25 price estimates for P&G stock . You can drag the trend line in the interactive chart above to see how increases to P&G's non-prescription drug market share affect the company's stock value.

See our complete analysis for P&G stock here



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: LRLCY , PG , REV , UL

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