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Profits Slip as OTC Drug Makers Spend More to Shore Up Core Brands

LITTLE FALLS, NJ, November 16, 2006 –

The top ten over-the-counter drug makers in the U.S. have seen their profit margins slip an average of 4% since 2001, effectively erasing the gains made in the previous five-year period, according to a newly released study by Kline & Company.

The average profit margin for the top ten companies is now just below 20%, down from almost 24% five years ago, according to OTC COMPETITOR COST STRUCTURES USA 2006. A key reason for this decline is an industry-wide jump in ad spending, according to Laura Mahecha, healthcare industry manager for Kline’s research division.

“Drug companies are having to spend more to compete with other brands and private-label products, and they are sacrificing profits in the process,” says Mahecha.

Kline’s study examines the profitability and cost structures of ten major OTC companies in the U.S. market. It reports that ad spending went up nearly $600 million from 2004 to 2005, and consumer product giant Procter & Gamble was responsible for a good amount of the increase.

“P&G spent a little over $100 million to advertise Prilosec OTC, which was a giant increase over the prior year’s spending of only $47 million,” Mahecha says. “P&G’s strategy was to build brand awareness and loyalty before the private labels hit the market, and they did it with big spending on this one product.”

Packaging costs for drug companies also rose, averaging nearly 7% of net sales in 2005, up from almost 6% in 2001.

“Hurricane Katrina definitely drove up packaging costs because of its impact on the production of petroleum-based resins and aluminum ingot used to make blister packs,” says Mahecha. “It also had a significant impact on distribution, with the increase in fuel and transportation costs.”

Despite the overall drop in profit margins, Kline’s study indicates that some companies have lost ground simply due to significant investments that were made with an eye toward the future.

“Some of the companies whose performance may not look so great in the short term have actually made strategic moves to position themselves for long-term profitability,” says Susan Babinsky, senior vice president and head of Kline’s consumer products consulting practice. “We’re seeing a significant focus on supporting core brands and major acquisitions. J&J is following this strategy in their purchase of Pfizer’s OTC unit, developing leading brands in core categories as well as shoring up its international presence with some large global OTC brands.”

OTC COMPETITOR COST STRUCTURES USA 2006 analyzes the overall cost structure of the OTC industry, including cost of goods sold and marketing, administration, and R&D expenses. Profiles the top nine branded companies and the largest private-label supplier (Perrigo) include an overview of each company’s OTC business, an assessment of domestic OTC sales by product class, and an analysis of their individual costs, expenses, and profitability. The report provides line-item detail that allows OTC companies to benchmark their business against that of their competitors and make strategic decisions toward increasing profitability.

For more information on this study, go to www.klinegroup.com/reports/Y617.asp or contact Laura Mahecha at +1-973-435-3446. In Europe, contact Erin Durham at +39-0331-976969.

To learn more about Kline’s customized healthcare consulting capabilities for the healthcare field, contact Susan Babinsky at +1-973-435-3365 or susan_babinsky@klinegroup.com.

Established in 1959, Kline & Company (www.klinegroup.com) is an international business consulting and market research firm serving the life sciences, consumer products, specialty chemicals, and energy industries.

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