Mobilising for action in consumer healthcare

pharmafile | April 16, 2013 | Feature | Manufacturing and Production, Medical Communications, Research and Development, Sales and Marketing |  A.T. Kearney, healthcare products, marketing 

A new market of consumer-focused healthcare products is emerging to occupy the space between consumer goods and pharmaceuticals – and becoming a battleground that giants in both industries are gearing up to dominate.

Many factors – consumer awareness of health issues, higher personal incomes, more focus on fitness, and the urbanisation of emerging economies, just to name a few – have combined to drive the market for healthcare products. Currently worth in excess of $500 billion annually, the world’s leading pharmaceutical and consumer goods companies are eager to do battle for this new market’s seemingly unlimited potential.

These companies bring different strengths – and weaknesses – to the battle. We believe the successful consumer health company of the future will combine the genes of both industries into a winning formula, able to engage consumers and prove the clinical effectiveness of their products and as adept at dealing with medical professionals as negotiating supermarket shelf space.

Even more important, such a company will have the ability to identify unmet consumer needs and develop innovative ways to unlock true value in the marketplace. The fight for the consumer health market is a war with multiple fronts, and participants will have to organise effectively, move swiftly, and know which battles they must take on and which tactics will ensure victory.

Defining consumer health

The consumer health market covers a wide range of categories and products, all of which claim to improve some aspect of health or wellbeing and are not generally reimbursed by healthcare systems.

Product characteristics vary widely, with the two most essential dimensions being the consumer needs they address and the strength of the claims they make. But the market presents a real paradox. Given the rise of chronic diseases, higher household incomes, and more consumer knowledge and awareness about health, one would expect the consumer health market to be growing by leaps and bounds everywhere.

This is not the case. Globally, consumer health markets are growing at an average of 5.7% but are lagging overall GDP growth. Compared to other categories, consumer health grows at a snail’s pace, particularly when times are good.

For example, between 2005 and 2012, consumer health categories in India grew by less than 13% a year, but the cosmetics market grew more than 27% per year. There is also a common belief that the market is being driven by consumers bearing an increasing burden of health costs. Not so: the proportion is actually falling, and consumer health spending generally lags overall health spending.

Several things are responsible for this relatively slow growth and are key to unlocking its future potential. First, getting people to become more health conscious is not easy. According to Eurostat, 80% of the UK population believe themselves to be in good or very good health, and only 5% consider themselves to be in bad health – this in a country where 23% of the people are obese and more than 30% have hypertension.

Even when people do know they’re unhealthy, they look to their health system for treatment rather than address the problem themselves. Second, the market faces a real innovation deficit. Portfolios of leading consumer health companies feature products that are an average of 30 to 50 years old.

The OTC market has historically been driven by so-called Rx-to-OTC switches, where drugs containing certain pharmaceutical ingredients and available only with a prescription are licensed for sale over the counter, once their safety profile is well established (and, typically, once the product has lost its patent protection).

However, only a handful of active ingredients have achieved OTC-switch status in the US over the past five years. Meanwhile, the pipeline of new pharmaceutical ingredients coming off patent is drying up, and the few that do exist, such as anti-psychotics and biopharmaceuticals, are unlikely to be suitable for purchase over the counter. In this market, innovation has been basically limited to marketing and product variants rather than scientific efforts.

This isn’t to say the market lacks sweet spots of significant growth opportunities. A look at historical growth rates reveals that the relatively new lifestyle categories, such as food supplements and energy drinks, are driving market growth, signalling a shift from illness to wellness as the new consumer motivator.

With such a wide range of product categories to choose from, perhaps the biggest question becomes which battle to fight – and where? Which categories are hot? Which markets are driving the most growth?

Four strategies for success

A.T. Kearney has developed four basic strategies that build on the traditional strengths of both the pharmaceutical and consumer goods industries. Appropriately enough, they take as their starting point either the consumer or science-based industries.

Mass-market maximiser. This is a traditional consumer goods play. The idea is to identify niche products currently confined to specialist channels and use brand-led marketing to grow – as we saw in the probiotic health drink example. In this strategy, the premium of professional endorsement is sacrificed for volume.

Shelf space is maximised through traditional tools of flavors and multi-packs, and retail collaboration is increasingly the source of innovation. This works well for aspirational products, for which professional recommendations are less important.

Category champion. A refinement of the mass-market maximiser strategy, the category champion positions the consumer health company as trusted supplier for specific health needs. Scientific credibility, professional endorsement, wide distribution, consumer insight, and smart marketing are all key requirements. Oral care and baby care are good examples, and this will probably be the winning strategy for areas such as diabetic food.

This strategy requires a broad mix of pharmaceutical and consumer goods capabilities and the ability to apply science to consumer needs, and create innovative ways of engaging consumers. It requires both sales skills to medical professionals and old-fashioned shelf-space battles in retail channels.

Discovery-driven disruptor. For companies that boast genuinely new science, the discovery-driven disruptor emerges as a strategic option. The market potential is immense for any company able to develop consumer products that delay the onset of dementia or diabetes, for example – but the science has to work.

Products in this category include foods and drinks, and also services and technology. Addressing chronic diseases may well require more than consumers buying a product – it will require them to get involved in a programme that changes their behaviour.               

The weight-loss market provides a good example. Virtually every ‘magic pill’ has failed to take off, as was the case with GlaxoSmithKline’s Alli, a weight-loss product that, despite a skillful global launch, exhibited distressing side effects that rendered it unsuitable for unsupervised use.

Meanwhile, behavioural programmes such as Weight Watchers thrive. Such health-oriented programmes are a challenge to pull off successfully: getting people to manage their weight is analogous to Nike’s decades-long campaign to get them to run. But with the rate of Rx-to-OTC switches slowing down, where will innovation come from?

Every pharma company has a large parts bin of rejected molecules that failed to provide sufficient benefit in clinical trials or weren’t patentable or worth reimbursement. This would be a good place to start looking. Remember, Viagra is just a failed heart drug.

Scientific specialist. The scientific specialist produces products that meet health needs but are not reimbursed or are given as adjuvant therapies to more conventional medical interventions; a typical example would be dysphagia (difficulty in swallowing) and specialist nutrition.

Distribution will be through specialist retailers or health professionals, with professional and peer recommendations the essential selling tools. This is probably the easiest area for pharma companies to enter, although consumer goods companies such as Nestlé and Danone are significantly invested in this strategy.

Which strategy is the right one?

The answer will depend on the battleground – the category and geography – as much as the heritage of the company itself. This raises the question as to how many diverse strategies an individual company can pursue and what breadth of portfolio it can successfully support.

Who will be the winners?

It would be easy to conclude that consumer goods companies will win the consumer health war. When the consumer goods companies muscled in on the perfume industry, they not only transformed its prospects but came out on top. Recent strategic moves by consumer giants seem to confirm, that after a long flirtation with healthcare, they are now ready to take it seriously.

Procter & Gamble, for example, is seeking to accelerate the build-up of its regulatory and pharmacy management capabilities by joining forces with Teva, a global leader in generic drugs. Nestlé is investing $500 million in a health science division. Danone is transforming into a healthcare company.

Pharma companies moves – minor OTC portfolio reshuffles and a few acquisitions –  are rather tentative by comparison. A closer look at two factors, however, makes the overall outcome less certain.

First, while the consumer health industry is bound to consolidate, it will happen by category, and the sheer number of categories guarantees a fragmented industry with room for many players, both large and small, for the foreseeable future. Second, regulation is the wild card. In many large markets, regulators are intervening aggressively, thus changing market rules and playing to the strengths of traditional pharma players.

If consumer goods companies cannot adapt to these more highly regulated and complex environments, they risk being constrained by categories without serious health claims.

The result: missing out on areas where they might be able to create greatest value.

As in all types of evolution, the winners will be those that adapt best to their rapidly changing environment. The winners in consumer health will be an entirely new species, but it is far from clear which gene set will prevail.

References

• The first paper, Winning the Battle for Consumer Health: Science versus the Marketers, is available at www.atkearney.com.

• “Dietary Supplements and Cancer Prevention: Balancing Potential Benefits Against Proven Harms,” April 2012, Journal of the National Cancer Institute

• US Department of Agriculture Economic Research Service International Macroeconomic Data Set (January 2012); United Nations, Department of Economic and Social Affairs, Population Division (2011)

• “Yakult President Opposed to Danone’s Stake Increase,” June 2012, Daily Yomiuri Online, www.yomiuri.co.jp

• “Slim pickings for a new drug strategy,” Financial Times, June 25, 2012

• See Executive Agenda article, Looking at Failure with a Fresh Eye.

COMMENTARY

Be in the right place and buy – strategies that companies are using to get a slice of the consumer healthcare market. The race is on between companies to capitalise on the lucrative consumer healthcare market. The attraction of this market for pharmaceutical companies is understandable – it offers the predictability of revenues over the long-term, particularly during a time of drying innovation and cost pressure from governments. For consumer goods companies, the market offers the potential for high margins and high premium products.

With this increasing interest in consumer healthcare, we have seen an increasing number of big moves from a number of the leading consumer goods and pharmaceutical companies who want a slice of the action.               

Companies like Nestlé, Coca-Cola, GlaxoSmithKline and Proctor & Gamble have all made moves, strategic partnerships and acquisitions that signal their intention in this area. Most recently, Reckitt Benckiser, on top of its recent decision to acquire Schiff Nutrition for $1.4 billion, announced a deal with Bristol-Myers Squibb, which will enable the company to build its consumer healthcare presence in Latin America.

This flurry of commercial deals in the consumer healthcare space begs the question of whether acquisition or organic growth holds the key to profitable growth. At A.T. Kearney, we reviewed the growth strategies of all the major players in the market. What is clear is that both being in the right place and acquisitions are key to driving growth.

Pharma versus consumer

Take the case of two leading consumer healthcare companies, which for the purposes of this piece we will call Company A and Company B. Company A comes from a pharmaceutical heritage and Company B from a consumer heritage. Both companies more than doubled their revenues over a five year period between 2006 and 2011.

But they did so in slightly different ways.  In the case of Company A, 35% of its growth came from just being in the right place, enjoying the upside of high growth markets. While in the case of Company B, this accounted for less that 20% of its growth.

In both cases, however, acquisitions played a major role, accounting for 55% of Company A’s growth and over 70% of Company B’s growth. What is surprising is the limited impact that brand building seems to have had for both companies, accounting for around 10% of growth for both companies over the period.

In order to make the most of this new market, companies need to be looking at extending their portfolios through acquisitions and strategic partnerships and, at the same time, channeling their investments into geographic markets that offer the highest exposure to growth.

This combination of factors helps to explain the current land grab for quality assets. This is a market which is already hotting up. Both pharmaceutical and consumer goods companies need to act fast to ensure that they do not get left behind in the race to secure market leadership.

Winning the Battle for Consumer Healthcare: Mobilising for Action – A.T. Kearney. A Five Point Plan

To support pharmaceutical and consumer goods companies in their efforts to realise the market potential of consumer healthcare.

1. Understand the drivers of growth

Developments, such as an increasingly ageing population in Europe, mean that there will be an explosion of the market for consumer health. However, many of the greatest opportunities for growth are being missed by both pharmaceutical and consumer goods companies alike.

To succeed in the consumer healthcare market, companies need to get much better at identifying global hotspots in demand, plan their portfolio appropriately, and learn how best to reach the new types of healthcare consumer. For example, in Western Europe, the companies that will do best will be those that develop innovative solutions to the very real health problems faced by older people.

2. Identify battle strategies

There is little doubt that the consumer health market is hotting up. Companies need to understand where they can realistically compete, as well as identify the most appropriate ‘battle’ strategy for their products. We recommend that companies consider the four strategies we have outlined in our study. These are based around:

MassMarketMaximisers: Companies that sell niche products to the massmarket.

Category Champions: businesses that are trusted by consumers to address specific health needs.

Discovery-Driven Disruptors: companies that focus on ‘novel science’ to address unmet needs.

Scientific Specialists: firms that sit at the clinically complex end of the market.

3. Establish your organisational model

Consumer health is a unique industry, different from both the pharmaceutical and consumer goods industries. Companies that want to capitalise on the potential of the consumer health market need to quickly determine the right organisational model for the business.

Most consumer health companies face two major organisational decisions: the degree to which the business should be decentralised or globally driven; and whether consumer health is such a different business that it needs to be run independently of the main business, be it pharmaceutical or consumer goods.

Start your decision making process from an understanding of what will drive success in your chosen battle strategies and organise accordingly.

4. Assemble the right capabilities

Both the pharmaceutical and consumer goods industries bring with them a number of characteristics, which could help them thrive in the new market. However, no company has ‘broken the code’ for success just yet. Consumer goods companies are skilled at devising effective marketing strategies and have strong brand portfolios that dominate categories.

Whereas pharmaceutical companies are adept at delivering innovative products with proven efficacy and credibility and are used to operating in highly regulated and complex environments. Companies hoping to do well in the new market will need to look at how they can combine the successful elements of both these unique industries in order to develop well targeted innovative products, which have a strong evidence base behind them, and are available to a large number of consumers.

5. Act quickly

No matter how good a company’s strategy and tactics are, the inability to put these plans into action will always result in defeat. Businesses that want to capitalise on the consumer health market will need to move quickly. This is not least as a result of the current ‘land grab’ underway for quality assets, with a number of companies forming strategic partnerships outside of their own traditional industries, such as Coco-Cola and Sanofi.

We firmly believe that the future winners in the consumer health market will be those who adapt best to the rapidly changing environment.