Equity Research 26 September 2019 FOCUS Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 33. Restricted -InternalGlobal Consumer Health Consumer Health Survey 2019: digital caveat emptor As reviewed in our annual deep dive (Heal thyself (still at corner store) (01/07/19) the consumer health landscape and its OTC core have proven to be continued somewhat tough going for the EU companies that dominate the latter in particular (i.e. GSK, SAN, BAYN), with the sector continuing to bump along at LSD FX-adjusted revenue growth. Compounding that perception of underperformance, investor sentiment to the space moreover remains somewhat mired by concern over structural digital channel penetration risks. That notwithstanding, purer consumer plays not only continue to trade at wide multiple premiums to their conglomerate pharma peers but have seen that extend YTD (i.e. the likes of RB, PG, NESN). Meanwhile corporate activity is re-drawing the landscape igniting renewed interest in the space given the potential forthcoming opportunity to own focused OTC assets (i.e. GSK and potentially RB/SAN see inside). All of that makes tracking consumer attitudes to brands and purchasing habits in the space critical to assessing risks for the outlook: accordingly, we here present the 2019 iteration of our proprietary primary market research US consumer health survey to assess purchasing habits and attitudes towards national brands vs. store/generic brands; willingness to purchase digitally; past, present and anticipated buying patterns and brand preferences in key therapeutic categories, along with perspectives from our colleagues across the breadth of Barclays consumer coverage i.e. RB (Simpson), PG (Lieberman) and JNJ (Stewart). Implications for BAYN (OW)/GSK (EW)/SAN (EW) (Papadakis): We see the survey results as constructive given the reassurance they provide on the continued importance of brand loyalty and trust. While BAYN is the only major Consumer player we rate OW (and it does represent an OTC recovery story in that regard given Q219s return to growth), GSK represents the obvious route to capitalize upon our positive Consumer stance given the rare opportunity to own a pure play asset in light of the stated intent to spin OTC in 22. Despite nascent investor optimism, we believe prospects for a similar story unfolding at SAN are low. Implications for Barclays broader Consumer universe: JNJ (EW, Stewart): We view the results of the survey as somewhat mixed for J Household for further comment please see the research of our EU Consumer colleagues (Iain Simpson) for GSK we refer to our prior commentary: e.g. GSK: Breaking up? Not so hard after all. (19/12/18) For Sanofi we refer to recent press commentary, e.g. see Sanofi Revival Depends on Outsider With a Nose for Big Drugs -10%0%10%20%Q2'13Q3'13Q4'13Q1'14Q2'14Q3'14Q4'14Q1'15Q2'15Q3'15Q4'15Q1'16Q2'16Q3'16Q4'16Q1'17Q2'17Q3'17Q4'17Q1'18Q2'18Q3'18Q4'18Q1'19Q2'19Nestlé SAN (ex. deals/port. Adj.) BAYNP EW: Equal Weight; UW: Underweight. Cons = Bloomberg consensus forecasts; BARC = Barclays Research estimates Source: Bloomberg, Bloomberg consensus forecasts (STOXX600/SXDP), Refinitiv, Barclays Research estimates FIGURE 4 Consumer sector valuation summary Notes: Beiersdorf, LOréal and Reckitt Benckiser are covered by Iain Simpson, and Nestle by Warren Ackerman, as part of our European Consumer Staples universe, industry view Neutral. Procter EW: Equal Weight; UW: Underweight. Cons = Bloomberg consensus forecasts; BARC = Barclays Research estimates ¹Merck's free float represents approximately 30% of outstanding issuance Source: Bloomberg, Bloomberg consensus forecasts (STOXX600/SXDP), Refinitiv, Barclays Research estimates AstraZeneca Papadakis OW 7127 8200 15% 28.4 22.0 8456 19% 29.3 116 27.4 24.9 20.9 24.7 19.1 50% 52.7 17.7 14.4 3.1% 1.5% 24% 21% 15% 11% 1.2 1.5 2% 29%Bayer Papadakis OW 66.9 85.0 27% 12.4 11.4 131 95% 19.1 73 9.8 10.0 8.8 9.8 8.9 -40% 22.1 8.9 8.4 4.3% 6.0% 11% 6% 2% 1% 0.9 2.8 1% -12%GlaxoSmithKline Papadakis EW 1658 1600 -3% 13.4 13.2 2396 45% 20.0 102 15.3 14.1 13.8 13.9 13.7 -16% 18.0 10.8 9.7 4.8% 7.3% 4% 5% 5% 4% 3.5 2.2 3% 12%Novartis Papadakis UW 85.9 80.0 -7% 15.6 14.7 75 -13% 14.6 196 16.8 16.6 15.0 16.8 15.8 2% 22.6 13.1 12.2 3.4% 6.3% 6% 4% 0% 0% 2.9 1.2 -3% 22%Novo Nordisk Papadakis EW 349 325 -7% 19.8 17.0 329 -6% 20.1 123 21.3 21.3 18.5 21.3 18.3 30% 21.2 15.2 14.1 2.4% 3.8% 11% 7% 6% 3% 1.9 0.0 2% 17%Roche Papadakis OW 283 320 13% 16.6 16.3 347 23% 18.0 241 14.7 14.5 14.1 14.7 14.4 -11% 16.6 10.3 10.0 3.2% 6.2% 6% 7% 3% 3% 2.4 0.1 3% 24%Sanofi Papadakis EW 81.4 80.0 -2% 13.6 13.3 80 -1% 13.7 112 13.8 13.9 13.0 13.9 13.6 -15% 24.8 11.3 10.8 4.1% 6.0% 3% 2% 3% 2% 5.4 1.4 6% 9%Large cap average 17.1 15.4 19.3 17.0 16.5 14.9 16.4 14.8 25.4 12.5 11.4 3.6% 5.3% 9% 8% 5% 4% 2.6 1.3 2% 15%SXDP (STOXX Healthcare) 17.9 2.8% 1% 12%SXXP (Stoxx 600) 14.9 3.7% 6% 2%DPS Yield '19EEV/ EBITDA 2020E (x)EV/ EBITDA 2019E (x)Coverage summary PricePrice TargetPotential Upside Downside to PTCore P/E prem/ disc'19ERatingPT implied 2019 P/E (x)NPV Up/ down-sideBARC Core P/E '20ENPV/ shMarket cap ($bn)PT implied 2020 P/E (x)BARC Core P/E '19EBARC Adj. P/E 2019E (x)NPV implied '19 P/ECons Core P/E '19Lead analystBARC EPS CAGR '19E-'24E3yr PEGFWD1mo perf (EUR)1yr perf (EUR)BARC EPS CAGR '19E-22EBARC SALES CAGR '19E-24EFCF Yield '19EBARC SALES CAGR '19E-22ENet debt/ EBITDA 2019E (x)Cons Core P/E '20BARC IFRS 2019E (x)EV MVRating $bn $bn 19E 20E 19E 20E 21E3yr('19 - '22)5yr ('19 - '24)3yr 5yr 19E 20E 19E 20E 19E 20E 19E 20EBeiersdorf OW 119.0 10% 108 BBG EUR 25.4 30.1 0.7% 0.7% 31.7 29.6 27.0 8% 3.7 2% 2% 19.5 18.3 3.3 3.1 16.9% 17.1%L'Oreal EW 265.0 7% 247 BBG EUR 153.4 153.6 1.7% 1.8% 31.8 29.6 27.6 6% 5.6 3% 3% 22.7 21.3 5.2 4.9 23.0% 23.2%Nestle OW 115.0 7% 107 BBG CHF 396.0 352.8 2.5% 2.6% 24.2 22.4 20.9 8% 6% 3.2 4.1 4% 4% 19.6 18.6 4.2 4.1 21.4% 22.0%Procter instead GSKs Tums and P instead Prestiges Clear Eyes and Visine were at the top. Oral care brand use in our survey closely reflected North American sales, with Church while our survey ranked Claritin and Aspirin as the third and fifth most popular brands, respectively. For GSK, digestive and cough cold and allergy are key segments. While our survey showed Tums as the most used digestive product, GSKs Flonase was ranked as one of the least used products. Sanofis key area is cough, cold and allergy, but Allegra was the second least used product in our survey. Takes for EU Pharmaceuticals: GSK (EW PT£P16)/SAN (EW PT80)/BAYN (OW PT85) (Papadakis) We think survey results again support a constructive view of OTC fundamentals and the evenly balanced risk/opportunity that greater digital channel penetration represents. As we previously expressed, we view the OTC slowdown witnessed in recent years (from c4-5% constant currency growth to c2-3%) as a transient function of the digital channel and pricing pressures witnessed in other consumer categories such as beauty and nutrition and the impact of a degree of portfolio pruning (e.g. both SAN/GSK have cited c1% headwinds to revenue growth from disposals). GSK and BAYN remain our preferred pharma names in Europe for consumer health market exposure. That said, whilst noting the latter is a recovery story that finally returned to growth in Q219, which should be further assisted by a (low-multiple) exit of the underperforming Scholls/Coppertone businesses, we continue to see the possibility of a breakup story at Bayer as remote. As regards Bayer we regard chances of a breakup as remote based on our previously published views of the company strategy, namely that as per stated intent, management intend to retain the companys diversified structure Barclays | Global Consumer Health 26 September 2019 9 and has no intent of disposing of consumer health. Similarly, despite recent press commentary (e.g. see Sanofi Revival Depends on Outsider With a Nose for Big Drugs), we regard it as unlikely that Sanofi will reshape the corporate perimeter to the extent of exiting Consumer Health given a historically risk-averse board attitude to group portfolio management. GSK in contrast offers a clear and well defined breakup story that, while some years off (the target date for a Consumer spin remains H222), is likely to see a tailwind of investor sentiment build as the event approaches. As regards recent performance and the outlook, in brief we note: For Bayer: we note BAYN FY19 guidance for consumer health sales is +1% CER and EBITDA margin 21%, which was re-confirmed at the Q2 earnings call, with CEO Werner Baumann highlighting the strong sales and earnings growth delivered by consumer health. Mid-term guidance (2019-22) is for a sales CAGR of +3-4% and a 2022 EBITDA margin is 24%. GSK has guided to a L/MSD 5yr CAGR to 2020 for consumer health and increased FY19 sales guidance by LSD at Q1 19, which remained unchanged as at Q2 19. SAN Q2 19 CHC sales up 1.1% as US growth more than offsets lower sales in Europe impacted by changing regulatory requirements and divestments, which will continue to dampen CHC performance in 2019 and H1 2020. FIGURE 6 Consumer Healthcare Divisions: FY19 and Mid-term Guidance Company FY19 Guidance (updated at Q2) Midterm Guidance BAYN Sales: +1% EBITDA Margin: +21% +3-4% sales CAGR 2019-2022 2022 adj. EBITDA margin target 24% GSK Sales: +1% L/MSD 5yr CAGR to 2020 Margin in the mid-to-high 20s by 2022. SAN - - Source: Barclays Research; BAYN, GSK, SAN Takes for US Medical Devices Household & Personal Care: PG (OW PT $134)/CHD (UW PT $67)/CLX (UW PT $141) (Lieberman & Grafstein) We find the overall survey results to be mixed for OTC players in our coverage universe (Procter & Gamble, Church & Dwight and The Clorox Company). To be sure, while private label is still somewhat benign, this year we see slightly less of a preference overall for branded products and notably a greater degree of ambivalence than last year. That said, for P&G specifically, preference for its branded OTC products seems to have increased versus last year. On the topic of private label, 24% of respondents expressed a preference for generic products (up from 22% last year) and 35% expressed a preference for branded products (down from 41% last year) while 41% had no preference (up from 37% last year), suggesting a sizeable swing population. Trust (47% of respondents) and effectiveness (39% of respondents) remain the key drivers of branded consumption while cost (70% of respondents) remains the key driver of store-brand consumption. We see little reason to expect this trend to shift in the near term. On the topic of willingness to purchase OTC products online, it seems consumers are still somewhat hesitant with just 13% of those surveyed purchasing most if not all of their healthcare purchases online (down from 14% last year) and 48% stating that they purchase no or very few healthcare items online (up from 45% last year). Interestingly, of those who are willing to purchase healthcare products online, were seeing a slightly greater uptick in willingness to purchase generic products (18% vs. 16% last year) as 32% of respondents are more likely to purchase branded products (down from 38% last year). Procter & Gamble Cough, cold and allergy medication and digestive medicines were listed as frequent purchase categories in the OTC space. While the percentage of respondents who had purchased OTC cough, cold and allergy medicine over the past six months remained relatively unchanged (66% from 65% last year), the percentage of respondents who purchased OTC digestive products dropped six points (44% from 50% last year). In terms of key P&G brands, Vicks, Pepto-Bismol and Prilosec saw an increase consumer relevance