Keeping tabs on the top OTC players - OTC Special Report

The U.S. over-the-counter drug industry over the past year has been realigned through a series of mergers and acquisitions among its leading players. Products that used to be part of one company's portfolio now belong to another, and joint ventures and mergers are keeping the branded OTC market very interesting.

Johnson and Johnson/J&J-Merck continues to dominate the U.S. market, although American Home Products' purchase of American Cyanamid's Lederle OTC division gives the company a close second place. The Warner Wellcome joint venture, finalized last year, takes third place, while P&G, still single, follows in fourth place. Through its acquisition of the Sterling OTC line-up, Bayer (formerly Miles) moved up to fifth place. SmithKline Beecham falls in at sixth, with Bristol-Myers Squibb and Schering-Plough taking the seventh and eighth slots, respectively. Ciba's acquisition of Rhone-Poulenc Rorer's OTC lineup last December moved the company into the top 10 at about ninth place. Sandoz, Pfizer and Upjohn follow.

The deals

Johnson & Johnson expanded its OTC portfolio through smaller acquisitions in the past year, picking up the highly regarded skin and hair care franchise Neutrogena for $924 million, as well as Eastman Kodak's Clinical Diagnostics business for just over $1 billion. The skin care products acquisition filled what was a fairly large gap in an otherwise impressive OTC line-up. In 1993, J&J purchased French skin care concern, Roc SA. The purchase of the Clinical Diagnostics business complements J&J's existing ethically based Ortho Diagnostics Systems and home test kits marketers Direct Access Diagnostics and Advanced Care Products. Although J&J can certainly afford a much larger acquisition, it already has marketing rights to Merck's Rx-to-OTC switches, including Pepcid AC. If a mega-deal is in the future, it is probable that J&J will seek international expansion of its OTC portfolio, as its grip on the U.S. market is quite firm.

When American Home Products grabbed American Cyanamid for $9.7 billion in an unfriendly takeover last year, the attraction was obviously Cyanamid's prescription lineup. Cyanamid's Lederle Consumer Health division marketed only a few products, including Fibercon laxatives and Centrum vitamins. However, in terms of OTCs, it was a good match, as American Home Products was already strongly represented in most other OTC categories - brands of note include Advil, Anacin, Robitussin, Dimetapp, Dristan and Preparation H.

Currently, American Home Products' weakness is found in the antacids category, where it markets a group of second-tier brands, including Riopan. These brands are likely to face tough competition as the new generation of antacids, formerly prescription H2 antagonists, are launched this year. In this segment, American Home Products has marketing rights to Eli Lilly's Axid (nizatidine), should the brand be switched from Rx to OTC.

Glaxo's recent acquisition of Burroughs Wellcome for $15 billion should not significantly impact the latter company's joint venture with Warner-Lambert, Warner Wellcome. This is because Warner-Lambert also had an arrangement with Glaxo to market its Rx-to-OTC switches, including the best-selling prescription H2 antagonist Zantac (ranitidine). The FDA is currently reviewing the switch of that drug. Last year, the Warner Wellcome joint venture became official, giving Warner-Lambert access to Wellcome's Rx-to-OTC switch pipeline, which includes herpes treatment Zovirax (acyclovir). It's possible that Zovirax will never be approved for its desired indication for the self-treatment of genital herpes, a concept that has come under attack from various groups. However, the drug is available OTC in other countries for the treatment of cold sores.

Consumer products giant Procter & Gamble has not yet succumbed to mergers and acquisition mania, but it faces a rather vacant Rx to OTC switch pipeline and may need the transfusion of Rx products that an acquisition would provide. Of course, P&G may continue to enter into joint ventures to gain marketing rights to new OTCs. Last year, P&G entered into an agreement with Cygnus, which develops controlled-released delivery systems, to market smoking cessation and other potential OTC products. The Procter-Syntex Health Products joint venture launched the Rx-to-OTC switch analgesic Aleve (naproxen sodium) in 1994. P&G's partner, prescription drug developer Syntex, was purchased by Roche for $5.3 billion in early 1994, and Roche is said to be looking for other U.S. investments.

Bayer gets its name back

As its full-page newspaper ads proclaim, Bayer is using its first name again, having acquired the Bayer aspirin franchise from Sterling/Eastman Kodak, by way of SmithKline Beecham. Last year's announcement by Eastman Kodak that it was selling Sterling Winthrop tipped off a startling string of events. First, Sterling's prescription and European partner, Sanofi, bought Sterling's half of the prescription lineup in exchange for $1.7 billion plus its share of the joint-venture's European OTC operations. A few months later, SmithKline Beecham acquired the worldwide Sterling OTC portfolio from Eastman Kodak for $2.9 billion, then turned around and sold the U.S. and Canadian OTCs to Bayer for $1 billion. Hence Bayer once agains enjoys the use of its name - it operated under its Miles subsidiary while it was enjoined from using the Bayer name.

Sterling owned the aspirin brand trademark because Bayer's U.S. operations were initially confiscated by the U.S. government during wartime. Whether the products purchased were worth $1 billion remains to be seen. Aspirin, the core ingredient in the lineup, has experienced flat sales for the past several years, and the pain-specific Bayer Select group of products is being phased out. However, other products such as Flintstones Vitamins, Alka-Seltzer and an expanded lineup of liqui-gel cough/cold products are building.

SmithKline Beecham emerged from the tumult with Sterling's overseas OTC products and the jewel in the crown, analgesic Panadol, which is available in 64 countries. Earlier in the year, SmithKline Beecham purchased Diversified Pharmaceutical Services, a pharmacy benefit management company, for $2.3 billion. Merck set the stage for this type of vertical positioning by purchasing Medco Containment Services, and Eli Lilly later followed suit by purchasing PCS Health Systems. Emphasizing its commitment to human health care - and reducing its debt - SmithKline Beecham sold its animal health care business to Pfizer for $2.45 billion in November 1994.

More players must join

It's believed that most of the remaining major players, including Bristol-Myers Squibb, Schering-Plough, Sandoz and Pfizer, must join the mergers and acquisitions game to compete in the U.S. OTC market. Last year, Bristol-Myers expanded internationally with the purchase of French marketer, Upsa, which has a strong European OTC analgesics portfolio. Sandoz expanded vertically with the acquisition of baby food manufacturer, Gerber. But these acquisitions did little to bolster the companies' standing in the U.S. OTC market.

In fact, another smaller marketer, Rhone-Poulenc Rorer, fled the U.S. OTC market earlier this year by selling Ciba its meager OTC lineup. Ciba also purchased Johnson & Johnson's Iolab eye care business and two biotech companies last year. It began building its U.S. OTC business in 1992 with the acquisition of the Fisons portfolio.

In a more recent development, Hoechst purchased Marion Merrell Dow for $7.1 billion, but this should not significantly impact the OTC market, as MMD's OTCs are sold through a joint venture with SmithKline Beecham. Hoechst also is majority owner of generic drug manufacturer, Copley, which has run afoul of the FDA owing to production problems.

Obviously, the move toward managed health care has taken its toll on the prescription drug industry and in fact was the driving force behind many of the mergers and acquisitions that have occurred in the past year, especially the acquisition of pharmacy benefit management companies. However, many of the deals significantly impacted the OTC marketplace, whether by design or not. It is unlikely that the buying sprees have come to an end. The next few years will complete the consolidation of the OTC industry and determine how powerful the remaining companies will be.

Elizabeth A. Beezer is editor of UPDATE U.S.A, OTC Market Report, a monthly journal covering the U.S. OTC market. It is published by Nicholas Hall & Company, which provides journals, consulting services, seminars and reports to the global OTC drugs and beauty aids industries.

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