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 / Fourth Quarter 2002 / Issue 29(originally published by Booz & Company)


Flipping the “Switch”: Big Pharma’s Biggest Challenge

OTC Myths and Truths
Pharmaceutical companies proffer several reasons for owning such low-growth subsidiaries. Consumer health-care firms, they argue, have mass marketing skills, which pharmaceutical companies have historically lacked; they provide access to branding opportunities, shelf slots, and cross-marketing; they are an inlet into a less volatile sector with close ties to large retailers. Moreover, consumer subsidiaries can offer greater control over the entire life cycle of the drug, including its post-patent maturity. But are these arguments convincing?

First, “branding” in the OTC space has been oversold. It would be difficult to find a more highly valued brand than Tylenol, for instance, or a more respected marketing machine than Johnson & Johnson’s. Yet Tylenol is currently losing market share at a rate of 1 percent annually. The reason: Year after year, more and more consumers learn to harness the curative powers of the higher-priced “names” from lower-priced, identical private-label versions.

Second, channel access isn’t what it used to be. As discount retailers such as Wal-Mart steal share from pharmacy chains and grocery stores, OTC consumers are increasingly shopping in outlets that prefer to stock and sell private-label drugs, which have much higher margins and even benefit from free piggyback advertising (because of copycat packaging and homophonous names). The result is that the discounters’ share of the cold and cough category, for example, grew 5 percent last year, while drug and grocery outlets each lost 3 percent.

The third reason pharmaceutical companies own consumer health-care subsidiaries — albeit a rationale they’re reluctant to hype very publicly — is their belief in the potential of the OTC switch. “The only way [our parent company] can justify owning us,” one interviewee told us, “is because we make it easier to switch.”

In a perfect world, the switch can sing a loud song of symbiosis and synergy, orchestrating big pharma’s R&D brawn with OTC’s marketing might into a gorgeous opera of growth. Consider the anecdote of Advil. As patent expiration for prescription ibuprofen (branded Motrin) neared in 1984, Upjohn partnered with Bristol-Myers Squibb to sell an OTC version under the brand name Nuprin, while Britain’s Boots licensed American Home Products to sell its own version, Advil. AHP benefited from a marked advantage — its ability to explicitly mention the Motrin brand name in its advertising, a privilege contractually denied Bristol-Myers Squibb. Within 10 years of its launch, Advil held 17 percent of the OTC analgesics market, decimating both OTC Nuprin, which eked out a bare 3 percent share, and prescription Motrin.

But the switch is a strategy of fits and starts — an unstable ground on which to build a business. In the real world, outside big pharma’s star chambers, little recent evidence shows that switching will pay. The rate of switches has been declining since the mid-1990s. After peaking at eight in 1996, the number approved by the FDA fell to six in 1997 and three each in 1998 and 1999. There was only one switch in 2000 and 2001 combined, and as of this writing, there have been none in 2002. (See Exhibit 1.)

Although there is some indication that the drought may be ending — Schering-Plough has announced its intention to sell Claritin over the counter as early as fall 2002, inspiring other prescription allergy medications (Allegra and Zyrtec, for example) to follow suit — the future of switching does not appear to be much more promising than its recent past.

Because the pool of potential switches is known, marketers can build realistic scenarios. Starting with the universe of all switch candidates (which we’ll limit to drugs currently nearing the end of their patent life cycle, because virtually all switches have taken place on or about the date of patent expiration), it’s possible to forecast the approval process long established by the Food and Drug Administration (FDA). The common-sense criteria for “switchability,” according to the FDA, are: The drug must treat a condition that is not incredibly serious (e.g., a headache), and is fairly easy to self-diagnose and self-treat. In addition, the treatment must be easily self-administered (e.g., a pill).

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