CHPA Chat - When Is the Time Right? A Close Look at Mergers, De-Mergers, and Acquisitions

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Episode Summary

Good science, and new customer behavior mean the time is right for companies to evaluate their portfolios to position themselves for success. Tailwinds are good, private equity interest is high, and the self-care future is bright. When is the time right, and what is the timeline to divest and to invest? What sets you up for a successful transaction? How does culture play a part in the process? Enlightening insights make this episode of CHPA Chat one that industry leaders will want to hear.

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Crossroads by Alantra



Episode Transcript

Anita Brikman: Good science and new customer behavior mean the time is right for companies to evaluate their portfolios to position themselves for success. Tailwinds are good. Private equity interest is high, and the self-care future is bright. When is the time right? And what is the timeline to divest and to invest? What sets you up for a successful transaction? How does culture play a part in the process?

Enlightening insights make this episode of CHPA Chat one that industry leaders will want to hear. That's coming up.

Speaker 2: Welcome to CHPA Chat, conversations in the consumer healthcare industry with Anita Brikman.

Anita Brikman: Hey everybody. Thank you for tuning in for today's CHPA Chat. We are bringing you a discussion with Alantra's Rusty Ray and Chris Harley-Martin who are no strangers to the consumer healthcare industry. Our chat focuses on trends and insights in the dynamic world of mergers and acquisitions and will be of critical interest to leaders who are managing businesses in the face of this explosion in transactions. Huge opportunities exist and they're going to walk us through it today.
Hey guys.

Rusty Ray: Anita, thank you very much for having us. I'm Rusty Ray. I'm a managing partner with Alantra and I run the healthcare group in the US. I do spend a lot of my time in consumer health and have had the luxury of working on a number of transactions with my colleague here, Chris Harley-Martin, while he was at GSK. Chris has decided to join us as a senior advisor, among his many other activities. We're trying to really be an advocate for the industry and promote all these good activities.
Maybe Chris, you could introduce yourself.

Chris Harley-Martin: Thanks Anita, and thanks Rusty. Look, I think you've said it all. I was at GSK for 30 something years and left last year to set myself up as an independent advisor and have a number of roles now as a senior advisor, including working with Rusty and Alantra.

Anita Brikman: Rusty, let's start with you. How has consumer healthcare evolved over time going from a subsidiary of pharma to standalone industry with Fortune 500 players in this space?

Rusty Ray: It's kind of interesting and a little counterintuitive. I mean consumer health, OTC, the business itself is hundreds of years old if not older. I think it's seeing a bit of a refresh in the last 10 years and even more recently with the spinout of Haleon from GSK, I think is kind of a harbinger of things to come. OTC, from our perspective, has always resided within either smaller consumer health companies or as a subsidiary and often underappreciated subsidiary of large pharmaceutical entities. I think with the spinout of Haleon, with the pending spin of Kenvue from J&J and others that are actively talking about spinning out, we now have the emergence of a real OTC industry. It's not just something that's secondary to pharma.

What's really interesting is many of these companies now are faced with their own strategic vision, their own profitability profiles and M&A activity in order to drive growth. So I think that's really going to impact how people look at the industry, how people function in and around the industry. And quite frankly, it's really exciting for us as there's really something new blossoming on a space that's quite old and people feel like they know it. So we're really excited by that.

Chris, coming from industry, how do you see the change?

Chris Harley-Martin: Well, you're right. It's great to see the industry evolving. It didn't have much definition through the 20 or 30 years that I've been working in it, and now it does, and as you say, one or two companies de-merging and becoming their own entities. But more than that, because of the strong tailwinds behind self-care over the last few years and the way consumer behavior has changed, the scope of self-care evolving quite considerably, you're seeing a number of companies who are really strong businesses with good growth prospects and good margins becoming public companies, not just those that are spun out of these large pharmaceutical entities.

And there's a lot of innovation too. If you go to the less regulated parts of self-care, vitamins, minerals, and supplements, for instance, you're seeing a lot of businesses evolving there as well. So frankly, the breadth of companies on the market now is stupendous and the opportunities are massive.

Anita Brikman: Chris, on that point of the broadening scope of self-care, talk to me more about that.

Chris Harley-Martin: I think many years ago when consumer healthcare, or more specifically OTC products, were part of pharma companies, they were managed as part of a broad portfolio, not necessarily prioritized. So you did have some great brands and brands that have been around a long time, but they weren't always invested in. And you also had a very pharmacy-oriented, highly regulated kind of industry. I think what's been happening is that as consumer needs and behaviors have changed, as regulators and governments have tried to encourage more self-care to reduce costs, as products have evolved, including frankly, digital and not just pharmacological products, but other methods and systems to help people manage their own health, it has broadened from functional nutrition to RX to OTC switches.

I think just the variety has expanded both in terms of the depth within each category and then also the breadth of categories. Just recently, hearing aids became OTC in the US. I'm sure many of your listeners will know that already. But it's not the only category that has evolved almost from nothing. And although perhaps the pace of RX, OTC switches has slowed down, at the other end of the spectrum, the number of new companies coming to market with new propositions in supplementation particular is incredible.

Rusty Ray: Just to add to something that Chris said I think is a really important point is OTC historically has always been viewed in somewhat of a pharma light, meaning manufacturing, supply, regulatory and therefore kind of held up to pharma-like standards. I think for some of the larger consumer health players that were inside of pharma, this maybe constrained some of their opportunities and growth because VMS 10, 15 years ago maybe was not viewed as a serious category. The quality of the manufacturing and so forth was nowhere near the pharma levels that we see.

That said, obviously the VMS space and other wellness areas have upped their game in terms of branding, quality and supply, but I think that the larger consumer health players has also started to expand their thinking because they're seeing tremendous growth in these areas, which is really exciting. And now that they're maybe starting to disengage with pharma, they're able to take on these opportunities and look at them more carefully. That's not to say everyone doesn't want something that's clinically backed and has good claims and proof of concept, et cetera, but I think sort of the broadening of consumer health in the way that Chris said is giving people a lot more opportunity and a broader look at what consumer health and wellness actually means.

Chris Harley-Martin: Yeah, I think that's a useful point, Rusty. What seems to me has always worked that combination of good science products that work together with consumer insight, real relevant insights that reflect both consumer wants and behaviors and still holds true. But it's also the case that as the industry evolves and the focus becomes perhaps more on growth, there is more innovation, there's more incentive to innovate to bring new products to market. And in some parts of the industry there are many more opportunities to innovate not just with product but with services. And you're seeing that really evolve very quickly.

I think in particular where you have categories that require both perhaps a pharmacological intervention as well as a behavioral intervention; smoking control, weight control, mental health in some cases, these are all categories where that combination of science and insight delivered in a way with both products and service means that there's quite a dynamic space.

I think what we're seeing is the companies, particularly those that have de-merged to become their own entities, see themselves much more as consumer companies or fast moving consumer goods companies. And so they prioritize things that fast moving consumer goods companies prioritize; innovation, execution at retail or direct-to-consumer, bringing things to life through advertising and promotion. And again, this isn't exactly new, but it's accelerating versus when brands were really only owned by pharma companies who saw them as pharmacy only businesses, very oriented around healthcare practitioner recommendation. Which is still important for many categories, by the way, it's just that it's and rather than all.

Anita Brikman: Very well said. All right, so given this landscape, how are participants thinking about investment, capital allocation, growth and margin? Is it different than the past?

Rusty Ray: That's a great question. I think we touched upon it a little bit in the prior question, which is you are seeing certain areas of increased growth and acceleration. I would say VMS, wellness, some of the sort of non-traditional OTC categories have grown rapidly over the past five years, and I would say COVID certainly accelerated many of those. I think we're starting to see more investment in capital allocation into those areas, a more complete picture of wellness as it relates to corporate strategy and not just problem solution.

The other is channel. Obviously we saw, again due to COVID, channels changed. By no means is the corner drugstore going to go away, not in a million years, but people are having to pay more attention to DTC, e-com and Amazon, which I think has some interesting, I guess, implications for certain types of brands. There are certain brands and categories that really lend themselves to e-com and have grown much, much faster in those kinds of channels than more traditional channels.
That's kind of where I see investment in capital allocation going. That's from my perspective. I guess Chris, as an operator, you probably see it slightly different.

Chris Harley-Martin: Yes, I suppose so. I think the observation I have is that there are a lot of different models evolving for businesses and that tends to dictate the way they see capital allocation. In Europe, there is still quite a lot of mixed entities where you've got RX, OTC, generics, in some cases specialty, all mixed together. And the idea being that you kind of consolidate it through your offer to the pharmacist, and that works for a lot of companies. And so your capital allocation priorities would reflect that, the need to be really in front of the pharmacist and healthcare practitioner. At the other end, you might have a vitamin, mineral supplement business, which is direct-to-consumer with very low overhead and a real focus on innovation and getting the proposition right to the consumer and having a wide variety of products.

I also think it's interesting what people are not spending money on. I think as Rusty and I talk to both buyers and sellers we see that very few of them are really investing in their own manufacturing and supply. And actually, this is something that they're increasingly outsourcing. In some markets, they're even prepared to outsource some of the customer-facing activities; selling and distribution. Increasingly, it seems to us that the barriers to entry around the heavy lifting of capital expenditure are much lower than they used to be. You can run a fairly large business on a very small number of people these days and become very profitable, and there are quite a few companies doing that both in the US and Europe.

Anita Brikman: So how should players new and old in this space think about their portfolios given this changing landscape; regions, brands, categories, science and consumer needs? Let's dive into that. Rusty?

Rusty Ray: Well, I'll let Chris take the first step at that because he's thought about that all his life.

Chris Harley-Martin: Anita, the first thing, and I don't want to trivialize it, is that people should think about it. Actually getting anyone to think about their portfolio as a portfolio is a really big first step and to understand that it's important to refresh that portfolio over time and to stay relevant and to do it in a thoughtful way, but also a deliberate way that matches your own capabilities and how you want the business to evolve. And whilst all that may sound like consultants speaking and terribly obvious, you'd be surprised by how few people are really doing that.

Actually brands, regions, categories, therapy areas, molecules, I mean they can all make sense to different companies at different times. What I would say is brands continue to matter and that actually getting that connection between the offer and the consumer is incredibly important. And building equity and getting consumers to understand that there is something more than just the molecule on offer can matter incredibly for lots of different businesses.

Actually, I'm not for a moment saying there's no role for private label. There surely is. But my perspective on portfolio is that once you're actively engaged in it, you should be thoughtful about both buying and selling to keep it appropriate to the way you want the business to evolve to your own objectives. As I said earlier, I think a lot of the companies that are becoming public companies are prioritizing growth. So that alone suggests that you should be offloading the businesses that are growth diluted, if they maybe are not likely to grow into the future, have some competitive issues and investing in areas where you think there is more growth and more opportunity to build off your core capability.

And so for me, just engaging with the problem of how does that portfolio evolve and then being very proactive and thoughtful about it is the most important step anyone takes.
Rusty, what do you think?

Rusty Ray: I was just going to add to that more from a tactical perspective. What we often see is brands are held in portfolios far longer than they should be. You have a number of examples over time where brands with tremendous heritage and people never forget them. People still remember the commercial jingles from their childhood. They slowly die within portfolios because they just don't get the attention that they need. And maybe rightly so, because there are bigger, better fish to fries, as they say.

I think it behooves folks that own these to take a careful look and make hard decisions around them. Because what ultimately happens is these brands unsupported provide tremendous amounts of cash flow, tremendous margin, but they are growth dilutive. And as people maybe de-prioritize them in the first couple years, that's okay, the brand is still strong and maybe solid and flat. But as brands do start to decline inevitably, because without support they do, you start to see step function changes in distribution losses, et cetera, or new competitors coming into this space.

I would say that has a dramatic impact on value. And while it is hard to make a decision to re-prioritize the focus of the portfolio sooner rather than later, it will pay dividends in the long run because the value is there, the buyer set is there, you're not dealing with supply issues or with de-listings, et cetera. So yeah, that's always been a challenge as we've talked to industry participants big and small as to when is the right time to divest something if our focus has changed?

Chris Harley-Martin: Yeah, I think everyone's reluctant to give up the regular cash flows. A lot of these businesses, even if they're declining, is still very profitable. But as Rusty says, often that's the wrong decision. It would be better to go earlier. And actually the industry rewards that in M&A and the valuations for businesses that are still relatively healthy but simply non-core are not a priority are good.

And so if you want to enter the market to divest businesses today, even with the way the market is debt being difficult for private equity to raise and maybe some sentiment that perhaps things weren't as good as they were, actually the markets are still growing. The thesis around buying brands that have equity, but I have been unloved, that can be revitalized through simple activities like advertising, building some distribution, getting the price pack architecture, all of those things still hold.

I think Rusty and I are encouraging people to not wait if they have a prioritization. That means they have a set of brands that they would rather not be holding. There is, of course, the argument that it would be better to buy at the same time as you sell because you can't really shrink your way to growth. But actually, the industry is dynamic enough to allow you to do that over a reasonable timeframe. And setting goals over a two to three year timeframe allowing you to divest and acquire within that timeframe is very reasonable. It's not the kind of industry where you're going to struggle to find something to buy.

Anita Brikman: I love this idea of revitalization of heritage brands with the right care and attention.

Let's talk about private equity and its participation in this space. The shift in the industry, has it accelerated private equity involvement?

Chris Harley-Martin: Yeah, for sure. The last few transactions that Rusty and I did together when I was at GSK were predominantly private equity. There were admittedly smaller brands that we were selling to reduce complexity but also raise some cash. That said, it is the central thesis for private equity that they can buy these unloved brands, polish them up, get them to grow, in some cases build a platform that then allows them to exit where something has become substantive and an opportunity for others to invest.

I think because the industry has such strong tailwinds, there is good growth and margin to be had. Brands tend to be pretty resilient. You can find plenty to buy. Actually, private equities got more and more interested. They were reluctant years ago, I think, partly because of sort of an organizational dynamic. They weren't really organized into sectors, so almost looked at it geographically. And then when they saw OTC, they were kind of interested in brands but worried about regulation and whether that was something you had to be a pharma company to understand. But the more the industry has moved towards being a consumer-branded business, the more comfortable they've become in making those investments, using their skill set and getting the right management teams in, innovating, getting the consumer proposition better, let's say, or just simply investing in it, the more comfortable they've been to invest.

We find a great deal of excitement in private equity and accelerating rather than the other way around. Particularly in the US, where you've seen a lot of mid-market private equity invest in platform businesses, the thesis tends to be that they need to consolidate behind that to get their returns. So they buy one business and then they need to add more into it. Actually there's real interest to continue to do that and picking up individual brands is very exciting. Whereas you go to Europe and actually you've got mid and large cap investments going on; EQT with their investment in Karo, Bain, Cinven, which started building very large companies, and in some cases mixing their investment with a public shareholding. CVC's investment in Recordati being a good case in point. So private equity seemed to have leant in very hard to consumer healthcare.

There's one I think sort of blot on the horizon for me at least, which is not all of them yet have found their exit. I'm learning in the private equity world that it's all about the exit. Some have done very well there, and there are precedents, which does matter, but actually it's not the easiest environment to exit in. And yet because you're now seeing this industry emerge, because you're seeing reference points in terms of public companies shareholding a profile that allows you to work out how much your company might be worth, there's a benchmark which again is really important to helping private equity see where their exits might be.

Anita Brikman: Rusty?

Rusty Ray: Yeah, just to add to a couple of things. It is exciting to get private equity interest in the space. I would say 10, 12 years ago, it was largely strategics and for a handful of consumer-focused private equity that would often take an interest in brands or OTC. And it really wasn't that many. I think it was for all the reasons Chris had expressed, which is there wasn't an ecosystem around supporting private equity in these endeavors. Now there are. There's people that can handle logistics. There's people that can handle order to cash. There's people that can even handle marketing and brand fostering. These are not skill sets that are inherent in private equity. They're financial investors. They need a team.

The other thing that's been happening is probably over the last 10 or 15 years, we've seen a lot of very senior individuals come out of pharma OTC that have tremendous sets of experiences in launching brands, growing brands, switching brands, just stuff that takes decades to acquire. And they've aligned themselves with private equity firms to help them evaluate these opportunities. That's definitely given private equity more confidence in participation for sure.

But if you step back and look at OTC consumer health, I mean it's tailor-made for private equity. There's tons of M&A activity to do and be done. Valuations are high. They've never really softened. Even in certain downturns, they've still remained higher than generally other business types. They now have very clear precedents in terms of exits and those multiples are, well, staggering. And so I think those kinds of things have kept private equity interested and will only probably drive more folks into the space.

I would say every week without exaggeration, I get a new inbound request from a private equity firm that is newly interested in consumer health OTC. Now a lot of those will not go anywhere because, as we've just been talking about, it does take a lot of understanding of the space to transact in it and be successful. That is what I think people miss about OTC. They've seen some of these branded companies like, "Oh, we can market a brand." It's kind of a very simplistic view. And it's not that. OTC is this sort of unique combination of pharma and marketing. I mean, you have all the supply, all the regulatory, all the manufacturing qualities of a pharmaceutical product which require that skill set, married with direct consumer marketing, which is very un-pharma like.

It's a complex industry, and it's not for everyone, but I would say that there's definitely a growing interest, probably because of many of the factors that we've talked about today.

Chris Harley-Martin: I think it's also interesting to think about what do private equity care about? Rusty and I have been doing a series of podcasts under the Alantra name called Crossroads. We recently did one with a senior partner at Bain Consulting who do many of the diligence exercises for private equity. He was reflecting on the fact that although there is a lot of dry powder, in other words money, that private equity want to put to work, they do still need to be disciplined. And to Rusty's point, there is some anxiety about some of the way the industry is structured and whether they can actually operate in that area.

For instance, they're very, very keen to understand whether they're buying a brand rather than perhaps a molecule or something that hasn't actually got a consumer connection because that's where they think they can really add value. They're very wary of fads. You'll see a lot of products come to market, particularly in the US that appear to have got to a hundred million of revenue almost overnight. They worry a lot about how sustainable those businesses are. And so they get into the detail as to where is the sustainable rate of sale, and who are the customers, and where did this business come from, and is it sticky? I think that's a phrase they use a lot of the time.

And then lastly, is it a platform? In other words, can they do what they always do, which is buy a business and then add to it and then exit at the other end? Because ultimately that's their economic model. I think anyone who's thinking of transacting with private equity buy or sell side, frankly, should have those thoughts in mind as to what might be the things that are really driving their evaluation of assets.

Anita Brikman: So what makes for a good M&A transaction? Let's get into the weeds on that.

Rusty Ray: Good advice.

Chris Harley-Martin: Rusty, you're the banker. What makes a good-

Rusty Ray: Good advice. The very best advisor.

Chris Harley-Martin: Excellent advisors, yeah, definitely.

Rusty Ray: Yeah, that's right. I think the obvious points are you've got a good asset, you've got a wide group of buyers that are serious and understand valuations. That's all at the front end. And making sure that you're positioning the asset right and understanding how the asset can be reinvigorated if it's part of a tail or what growth exists around the asset class.

I would say the thing for me that people seem to remember most after we close or during close is the stuff that nobody likes to talk about. It's not the sexy marketing sale growth prospects. It's all the hard stuff that can really trip you up. It's supply. It's regulatory. It's long TSAs or long MSAs that nobody really likes. So making sure that your buyer, if you're representing the seller, has good qualifications and has "done this before", and isn't going to be the type of buyer that's going to come back to a large corporate and ask questions about marketing and selling and supply and all these things that can be really irksome and bothersome for a large seller. Because quite frankly, nobody's paid attention to these brands in years in some cases, so they've got no answer, but it becomes a real irritant.

So really making sure that you're poised to communicate and successfully transition the product as you get into the deal, that's the stuff I find hardest and very complicated, especially if you're dealing with multiple markets, and it's often the stuff people just don't think about. It's like, "Oh, we've got a supplier. We've got a vendor that manufactures this API and supplies, and we've been doing it this way for 30 years," and you just sort of assume that will continue. But the reality is once you get into those discussions, often you get thrown a curve ball because of re-negotiations of prices or supply constraints or different regulatory changes. That can really trip you up, and it can trip you up at the 11th hour and no one really likes that.

I think getting a clear visibility on that stuff early on and being able to set expectations for both buyer and seller around those issues early on, I think that makes for a much, much more successful transaction and a faster way to get to close than if you're waiting until the last minute.

Chris Harley-Martin: Transactions can go wrong at any point. I think Rusty's laid out the process steps. It can go wrong at the strategy stage when you're making choices and trying to decide the things that you really want to go after. At the point that you're writing a business plan or in the language of the private equity world of VCP, a value creation plan, the transaction itself can get stuck, actually negotiating contracts and detail within that. And then lastly, any aspect of separation or integration.

I suppose my experience has been two things that people pay least attention to but need really a lot more fault from the very beginning. First is culture. It is slightly obvious and yet seemingly always missed. Even in trying to work out whether there is a fit between companies, there's very little work done to establish that. And in some cases, it can affect the way you think about the choices you make as well.

For instance, some of the bigger companies at the moment are worrying about how to get more digital, how to bring in perhaps direct-to-consumer type brands into their operations and whether in fact that can infect their capability and suddenly their direct-to-consumer. But if you think about the differences between a bricks and mortar traditional OTC pharmacy-oriented operation and a direct-to-consumer vitamin business, they have so many differences, and the cultures are frankly, miles apart. So to think that you're going to integrate those onto your platform doesn't make a lot of sense. And yet that was where the industry kind of started. It's evolved a lot now, and there are some, frankly, companies doing some great work to keep the special source going for businesses that are quite different to theirs and understanding that the culture might matter.

The second thing is, again, sort of obvious, but so often missed the discipline of executing the plan that you've got in front of you. I can remember quite a few transactions where we'd written a plan, we presented it to the board, we'd closed, and almost the first day we started doing something completely different to what we said we were going to do and wondered why it was a struggle to get it done.
Just those two things alone; worrying about culture and the fit and how it's going to work in practice and the different habits and behaviors of the companies and the way in which the brands and businesses work. And then secondly, just really thinking about making sure that you can execute that plan that you've got. I mean, usually people have a 100-day plan, but you've got the resources in place to execute. And to the point Rusty made earlier, actually, one of the things private equity do very well is bring in a group of people who are capable, motivated, and incentivized to execute with excellence from the very get-go. And I think corporates can learn a lot from that.

Anita Brikman: Great watch-outs. Now I'm going to see both of you in person at SLS in Florida.

Rusty Ray: Absolutely.

Chris Harley-Martin: That'd be great.

Rusty Ray: Looking forward to the panel there, where many of these topics I think will be discussed with a much broader group and some really smart people on the panel. So looking forward to that.

Anita Brikman: Rusty, Chris, thank you both so much for your insights and for joining us on CHPA Chat.

Rusty Ray: Thank you.

Chris Harley-Martin: Our pleasure, Anita.

Speaker 2: Thank you for joining us here at CHPA Chat. For more information and to hear our entire catalog of shows, please visit


Chris Harley-Martin Headshot
Chris Harley-Martin
Consultant, CHM Consulting Limited & Senior Advisor, Alantra
Rusty Ray Headshot
Rusty Ray
Managing Partner, Alantra

The views expressed in this podcast are solely those of the speaker and do not necessarily represent the opinions of the Consumer Healthcare Products Association.

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