Johnson & Johnson's successful bid to acquire Pfizer Consumer Healthcare augments the company's oral care division into a billion dollar-plus business and expands the segment's global reach, the company said.

J&J announced June 26 that it will acquire Pfizer's consumer business in a $16.6 bil. cash transaction that is expected to close by the end of 2006. Pfizer announced in February that it was deciding whether to sell or spin off its OTC unit, which generated $3.9 bil. in 2005 sales.

The deal, which is subject to regulatory approval in the U.S. and Europe, will nearly double the size of J&J's consumer division and will create the world's "premiere consumer health company," J&J Chairman and CEO William Weldon said during a June 26 call.

The purchase "solidifies" J&J's position as the leading OTC firm worldwide, according to Colleen Goggins, worldwide chairman, Consumer & Personal Care group. It also "significantly diversifies our current portfolio and provides entry into higher growth categories," she said.

The acquisition will add Pfizer's Listerine mouthwash brand to J&J's Reach brand of toothbrushes and flosses, as well as its ACT fluoride rinse. J&J also recently added the Rembrandt line of toothpastes and whitening products to its oral care portfolio when it acquired the brand from Procter & Gamble's Gillette division in October (¹ Also see "J&J Enters Tooth Whitening Category With Rembrandt Purchase" - HBW Insight, 31 October, 2005., p. 8).

Listerine "will transform our oral care franchise into a billion dollar-plus business and expand our presence in 60 markets," Goggins said. It also will "help strengthen our relationships with leaders in dental and medical communities globally."

For the 52 weeks ended May 21, the Listerine brand (excluding breath strips) had dollar sales of $303.2 mil., representing a 52.2% dollar share of the U.S. mouthrinse category in food drug and mass outlets, excluding Wal-Mart, according to Information Resources, Inc.

The Listerine brand has been eyed for some time by Colgate-Palmolive, which was considered a potential bidder for Pfizer's Consumer Healthcare unit. Colgate recently noted Listerine would be a "good asset and a very good fit;" however, as the company said it would not "easily move into OTCs" and therefore would not make a bid for Pfizer's entire OTC business, its interest in Listerine indicated it could pursue purchasing the brand from a future owner.

In addition to growing its oral care lineup, J&J's purchase of the OTC division expands its adult skin care business with the addition of Lubriderm .

Lubriderm compliments J&J's skin care portfolio, which includes Aveeno , Neutrogena , Clean & Clear and Johnson's Baby line. J&J has stated that adult skin care will continue to be an "engine of growth" in the firm's consumer segment (² Also see "Neutrogena, Aveeno Fuel U.S. Skin Care Performance In Q4 – J&J" - HBW Insight, 30 January, 2006., p. 6).

For the 52 weeks ended May 21, Lubriderm had dollar sales of $55.9 mil. in food, drug and mass outlets, excluding Wal-Mart, according to IRI.

The deal also provides J&J with OTC brands including Visine , Neosporin , Benadryl and Sudafed .

The acquired OTC unit will give J&J a more substantial global presence, since more than 50% of Pfizer's OTC sales take place outside the U.S., Goggins said.

"We believe the opportunities for the Pfizer Consumer Healthcare brands are similar to those we envisioned for our skin care franchise a few years ago, when we acquired our Aveeno and Neutrogena brands, both of which have achieved significant growth since we acquired them," the exec added.

While J&J touted the merger for its potential to drive sales, some financial analysts questioned the move.

"The deal does make operational sense based on operational and distribution synergies, but is not the 'sexy' acquisition target in pharma, biotech or med tech that most investors and analysts were looking for," Citigroup's Matthew Dodds states in a June 27 research note.

"Hence, yesterday's announcement didn't receive a warm ovation as the stock traded down nearly 2%," he adds. J&J's stock price closed on Friday, June 23 at $61.74 but opened on Monday, June 26 at $59.60 after the early morning announcement of the deal. "We don't expect the addition of this consumer business to augment J&J's overall growth rate at all," Dodds states.

The analyst characterizes the Pfizer consumer business as "mature but safe" and notes that by purchasing the unit, J&J is "essentially becoming more comfortable" and low risk by offering the "broadest level of diversification in the healthcare space."

Following the integration of Pfizer's business, J&J will devote 25% of its business to consumer products, while devoting 40% to pharmaceuticals and 35% to medical devices and diagnostics, Weldon noted.

Dodds estimates that the Pfizer consumer business will grow sales in the 6% range over the next four years, which he says is in line with J&J's consumer business prospects, but down from the 10% growth reported by the Pfizer division in 2005.

J&J CFO Bob Darretta expects the largest portion of financial value from the acquisition to be achieved through ongoing growth in the long term. However, potential cost synergies of the combined entities are estimated in the range of $500 mil. to $600 mil. per year, he said, and should be fully realized by 2009.

Although the firm did not provide details on how those synergies will occur, Dodds writes in his research note that they are expected in the areas of promotion, distribution, manufacturing and personnel.

Though some analysts are questioning J&J's move toward a more diversified portfolio, the price that the firm paid for the Pfizer brands demonstrates how coveted the division was among bidders.

The $16.6 bil. that J&J paid was higher than originally anticipated for the unit. When Pfizer announced it was reviewing its options for the division, CEO Hank McKinnell said the price could be driven above $10 bil. (³ Also see "Pfizer Values Standalone Consumer Unit At $10 Bil." - HBW Insight, 13 February, 2006., p. 7). Estimates that followed were in the $14 bil. range.

"This suggests that at least one of the other bidders - the press has suggested GSK - was aggressive in its pursuit of this business," Dodds says in his note.

The pricetag is more than four times the 2005 sales of the division, while average prices in the consumer segment are two times annual sales, one analyst said during the call.

[Editor's note: This story was contributed by " ⁴ The Tan Sheet ," your weekly source for nonprescription pharmaceutical and nutritional news. For more information call 1-800-332-2181.]

J&J Acquires Listerine, Lubriderm As Part Of $16.6 Bil. Pfizer Deal

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