Prestige: Active M&A activity in the OTC sector expected to foster additional opportunities

TARRYTOWN, N.Y. — These are interesting times to be in the OTC business, Matt Mannelly, Prestige Brands president and CEO, told analysts Thursday. Because of the dynamics of the industry — a healthcare system encouraging greater self-care utilization and the fact that OTC is a cash-flow positive business — the OTC sector has become very attractive for big pharma companies looking for mergers and acquisitions. GlaxoSmithKline's partnership with Novartis and Bayer's bid for Merck's OTC business, not to mention Prestige Brands' acquisition of Insight Pharmaceuticals, may be just the beginning in what might become a very active M&A period. 

"OTC is becoming increasingly attractive to a number of key players," Mannelly said. "And the reason it's becoming increasingly attractive, if you step back and you think about the megatrends in terms of health and wellness and you think about self-medication and how important that is going to be moving forward, it has very good long-term trends for the OTC business. Also if you look at the retail landscape and you think about OTC products and their availability in the retail landscape today versus five years ago, it has increased. And I think we're going to see that happen again over the next five years as well," he said. "[OTC] continues to attract interest from the large pharma companies and the large CPG companies. The reason … is steady, slow predictable growth, very high gross margins, EBITDA margins and very significant free cash flow."

Mannelly fully expects M&A activity in the OTC sector to continue. "If you look at history in the consolidation and the acquisitions that have happened … it has created M&A opportunity," he said, including newly formed companies looking to shed non-core brands from their portfolios. 

Prestige's acquisition of Insight, which is expected to close later this year, brings to Prestige's portfolio the company's first $100 million-plus brand in Monistat. According to IRI data for the 52 weeks ended Dec. 29, Monistat generated more than $135.8 million across total U.S. multi-outlet channels.  

"The keys with that brand and with that portfolio are similar to what we have done in the past with other acquisitions and that is we need to increase the brand support, we need to focus on new product development in order to capture the long-term value of that brand equity of Monistat," Mannelly said. 

Prestige reported fiscal fourth quarter net revenues of $144.3 million, a decrease of 6.6% over the prior year. Reported net revenues for the fiscal year ended March 31 were $601.9 million, a decrease of 3.5% over the prior fiscal year’s revenues of $623.6 million. Behind the decline was an incredibly soft cough-cold season. "If you recall, not this last season, but the season before we had the strongest cough/cold incidences in 10 years," Mannelly said. "This year, as I said, for the first half of the season we had the weakest cough/cold incidents in 15 years and it was weak in the last quarter as well."


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