Thursday, April 02, 2009

A Dose of Consumer Goods Reality

The consumer goods industry may be inspirational to drug companies as they focus on paying more attention to bottom line details, efficiency, and diversification. But pharma has a long way to catch up if its goal is to be like Church & Dwight, best known as the manufacturer of Arm & Hammer Baking Soda.

Church & Dwight CEO James Craigie uses colorful terms to convey a message that is anything but. In recent investor presentations, he called “overhead cost management” his “favorite topic in the whole deck.” Regarding acquisition strategy, he stated bluntly: “We don’t take the employees of other companies, we don’t take their plants, we don’t take their headquarters. We blow all that up. We just bring in their brands.”

Invoking a term that some pharma CEOs are beginning to throw around—only without Craigie’s bite—Craigie continued: “Bolt-on acquisitions--we love them. We’ve got a great track record. We have a very defined model. We will only – and I say only—buy a number one or number two brand. We like higher growth brands with higher margins, and we prefer asset light deals. Again, we don’t want plants, headquarters, people. We don’t want anything. We just want brands.”

As for executive perks: “We walk the walk in overhead controls. We don’t even have company cars. We’re cheap (expletive). We don’t have golf club memberships. We don’t have corporate aircraft and things like that. If you came to our headquarters [in Princeton, NJ], you would think you were coming to a canning factory.”

What he does care about, he says, is the stock price. And Church & Dwight’s stock is trading at 52 as of the close of day March 31, 5.8 % off its 12-month highs (UPDATE: C&D was down 5.8% year to date and 3.7% year on year as of 3/31/09), but still solid, compared to its peers, which are trading near their 12-month lows, or, even more, to the S&P 500, which fell 40% over the past year, and the pharmaceutical industry, which is down 17.7 % for the 12 months trailing. C&D's earnings-per-share grew nicely, while the pharma industry's giants are routinely flat or down these days.

Even so, pharma may have trouble accepting consumer goods’ margins: Church & Dwight’s “mean and lean” strategy gave it an operating margin of 14% in 2008 and a profit margin of 8.06%, a return on equity of 16.2% and a return on assets of 7.32%. Compare that to GlaxoSmithKline, which is the biggest pharma proponent of “bolt-ons,” or Pfizer, which is trying to diversify into more consumer-oriented businesses—or even Sanofi, whose chairman recently said that he would consider food and nutrition acquisitions, including grocery stores.

For all its complaints, GSK’s net profit margin was roughly 19% in 2008 and its operating margin was roughly 30%. Pfizer’s net profit margin was 16.8%, about double Church & Dwight’s, and its operating margin of 20% was higher as well. Sanofi’s operating margins were 15.3% and its net profit margin was 12.08%; overall the major drug companies have average net margins of 17.7%, compared to the mid-single digits for most consumer goods categories.

The gap hasn’t stopped Sanofi Aventis chairman Jean-Francois Dehecq from confiding to Bloomberg that his company is considering whether to buy food or nutrition companies to complement its drug business. “Good nutrition can prevent many diseases,” he declared in a recent interview, noting that the company may even look at grocery stores. At one of Sanofi's predecessor companies, Dehecq tells Bloomberg, he tried to sell reduced-cholesterol cheese and butter—and although no one cared about such products at the time, now may be the moment. Any such moves would put Sanofi at the far end of the focus-or-diversify spectrum.

But for now, Sanofi is rumored to be interested in the pharmaceutical business of the Belgian drugs and chemicals conglomerate Solvay. If a deal does go through, will it be a “blow up,” – along the lines of Craigie’s definition of successful M&A—or Pharma’s more traditional style? In Europe, in pharma--we'd bet on the latter.--Wendy Diller

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