OTC and the pharmaceutical industry
Those darn inconsistent oligopolies! While the principle of convergence usually means that companies often follow parallel strategies, once in a while a trend gets reversed. In the past few years, pharmacy giants like Pfizer, Roche, and Bristol-Myers Squibb have sold off their over-the-counter products (both drugs and health aids) to concentrate on higher margin prescription, drugs. In 2004, Merck backs out of its joint venture European OTC division. But here goes GlaxoSmithKline heading in the opposite direction.
The company announced earlier this month that it will acquire CNS, the US-based maker of Breathe Right nasal strips and FiberChoice dietary supplements. Glaxo had earlier in the year tried, and failed, to buy out UK pharmacy store chain/OTC product supplier Boots as well as Pfizer's consumer products division.
Unlike those other two deals, the CNS deal is very small one by Glaxo standards with annual sales of $112.6 million. (Glaxo has overall annual sales of $37 billion). Breathe Right somewhat fits in with Glaxo's big presence in the prescription asthma drug business. The new acquisition will join GlaxoSmithKline's consumer-healthcare unit with such brands as the painkiller Panadol, Aquafresh toothpaste, thee Nicoderm smoking-cessation product, Tums antacid, the Allio weight loss pill, cold-sore remedy Abreva, and the fruit drink Ribena.
But what is happening, as we argued here is an ongoing specialization In the general pharmaceutical market.
- The #1 OTC company, Johnson & Johnson (Tylenol, Motrin, Band-Aid, Lactaid, Stayfree)), bought this year the Pfizer OTC brands (Listerine, Lubriderm, Visine, Efferdent, Bengay, Sudafed, Neosporin, Zantac) and last year bought our Merck in its joint venture.
- Novartis (Maalox, Tavist, Thereaflu, Neocitran) bought those of Bristol-Myers (Excedrin, Bufferin, No-Doz, Vagistat, Mineral Ice).
- And Bayer (Aleve, Alka Seltzer, Bactine, Bayer aspirin, One-A-Day) bought Roche's OTC products (Berocca, Aspro, Rennie, Supradyn) in 2004.
What we are seeing is a split in areas of specialization. Several big Pharma companies are building their OTC presence while others are abandoning it altogether. But OTC drugs, like generics, are a different business than selling patent drugs. OTC is a slow-growth, low profit industry.
An article from Strategy + Business ("Flipping the 'Switch': Big Pharma's Biggest Challenge", Fourth Quarter, 2002) puts it clearly:
Unable to create truly new products, OTC players are trapped in a cycle of line extensions, new claims, and line extensions of new claims, as, for example, Excedrin becomes Extra-Strength Excedrin becomes Excedrin Migraine, and so on. In this benighted world, when Pfizer's Benadryl managed to eke out 0.3 percent share growth in 2000 by launching Benadryl Fastmelt tablets for kids, it was considered a major success story.
Moreover, OTC products have little brand loyalty and in-house products do very well.
But more than anything, companies have retreated from OTC because it is quite another business with very different margins and business models than patented prescription drugs, much as generic drugs are a different business from patent drugs. Some companies (especially Johnson & Johnson) have thrived on a mix of OTC drugs, medical supplies, and some patented medicines. But it surely is an uneasy balance. It's like running two or three businesses at once. Of course, Bayer is even more schizophrenic manufacturing and selling chemicals as well.
6:16:31 PM 
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