Procter & Gamble says consumer health trends are on its side as the company increases focus on its consumer health business and moves away from pharmaceuticals.

An aging population and the trend of consumers proactively managing their health has fueled strong top line growth of the firm's consumer health brands in recent years, Rob Steele, vice chairman of the global health and well-being division, said during a Dec. 11 analyst meeting.

Therefore, the Cincinnati-based company's consumer health segment, which includes the oral care, feminine care and personal health businesses, will be the focal point of the company's research and development, licensing and acquisition efforts in coming years.

The firm will "deemphasize pharma and increase our focus on consumer health care, a business driven by strong brands, where trends are driving growth opportunities and P&G's core capabilities give us competitive advantage," said CEO A.G. Lafley.

"We really like consumer health care because it is a big market with over $240 billion in global retail sales," said Steele. "It is growing fast, at a 5 to 6 percent annual growth rate, is financially attractive with very healthy margins. And it is a fragmented market," he added.

P&G is the number two player in the category globally with a 5 percent share, trailing Johnson & Johnson, which has less than a 10 percent share of the segment.

Steele acknowledged there remains significant upside growth potential in the category due to demographic trends, including an aging population expected to triple by 2050 and an increasing consumer focus on wellness and managing health.

"As people age they are focusing more on wellness and redefining what it means to be old," Steele said. "Instead of associating old with a number, people are associating age with how they feel, their quality of life and overall wellness. Consumers are also taking more control by proactively seeking information on products that improve health."

P&G will capitalize on these trends through a combination of trade-up, a focus on promoting regimen usage of products and "entering category white spaces," Lafley said.

An example of driving growth through trade-up was the 2006 launch of Crest Pro-Health toothpaste, Steele said. The product's holistic oral health message appeals to consumers actively managing their health care and willing to pay more for products that promote better health (¹ Also see "Crest Pro-Health Benefits Squeezed Into Whitening Toothpaste" - Pink Sheet, 26 June, 2006., p. 8).

Though Crest Pro-Health carries a 35 percent price premium over P&G's base toothpaste products, it has gained 8 share points in the U.S. toothpaste market since its launch, Steele noted.

The product has contributed to a tripling of P&G's oral care business over the past five years.

The consumer health segment has also grown due to the strength of personal health brands, which include Vick's , Prilosec OTC , Pepto Bismol and Metamucil . Personal health brands have grown at a compound average rate of 20 percent and feminine care at a rate of 10 percent, P&G said.

A Shift In Priorities

P&G's focus on the consumer health business comes as the firm is moving away from pharmaceuticals, prompted by a difficult regulatory process and the costs and time involved in bringing new drugs to the market, according to Lafley.

"When P&G was at its peak of investment in pharmaceuticals in the late '90s and early this decade, the pharmaceutical industry was trading at multiples at least 10 points higher than consumer products," he said. "Today pharma companies trade at multiples at or below consumer products."

Though P&G will focus on managing four key pharmaceutical brands, it will consider divesting some or all of them, the exec noted. Further, the company will no longer invest in pharma R&D.

Lafley acknowledged that the company faces challenges in the current economic environment, noting that while it has promoted itself as recession-resistant, it is not "recession proof."

The company remains challenged by commodity and energy costs, a weakened dollar and category slowdowns due to "increased volatility as retailers and distributors try to manage inventory."

Further, the company is seeing some shift in the market toward private-label brands, though by the same token it is seeing higher sales of its value brands, such as Luvs diapers.

Though commodity prices are falling, P&G does not currently plan to roll back prices on products, but will continue to monitor the situation, Lafley said.

For the quarter ending in December, P&G reported it will fall short of the 4 to 6 percent organic sales growth target it previously set. However, for the year, the company expects to deliver organic sales growth in that range.

P&G said it will look to capitalize on the current economic environment by continuing to advertise in light of the fact that many competitors have cut back on marketing spending.

"In tough economic times many companies pull back on advertising, which creates an opportunity to buy more media and increase our market share versus competitors," Lafley said.

"We ensure consumers stay aware of innovation and the value our brands provide especially at times like this when every dollar counts."

The company will also continue to invest behind innovation to create products that build an "emotional connection" with consumers.

"Our focus on expanding distribution, entering category white spaces, building trial and strengthening our portfolio is how we intend to leverage P&G's fundamentals to win and grow sustainability in the current economic environment and well into the decade ahead," Lafley said.

"A strong, growing consumer health care business combined with our beauty and grooming personal care and household care businesses rounds out a robust and growth-oriented portfolio."

The meeting represented the last for CFO Clayton Daley, who is stepping down in January after 15 years with the company; he will be replaced by VP and Treasurer Jon Moeller (² Also see "P&G Braces For “Tough Year” Of Navigating Turbulent Economy" - Pink Sheet, 3 November, 2008., p. 11). Lafley dismissed speculation that he plans to retire early from the company.

- Eileen Francis

P&amp;G Focuses On Consumer Health, “Deemphasizes” Pharma

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P&G Focuses On Consumer Health, “Deemphasizes” Pharma