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Market Research: Natural and Private-label OTCs Post  Gains while Many Branded OTCs Suffer from Recalls  and Sales Declines, Leading to a Flat Market in 2010

By Laura Mahecha, Industry Manager, Healthcare

The portfolio of over-the-counter (OTC) products available in the United States has been continuously expanding through new product launches and Rx-to-OTC switches. The growth trend, which has relied primarily on extensive R&D efforts and heavy advertising, continues on into the new decade. However, the recent wave of product recalls has thrown a curve ball in the direction of some big industry players and has affected consumer trust in OTC drugs. The FDA has taken steps to provide more guidance to firms that manufacture, market, or distribute OTCs. After ruling on a regulation in 2009 that required manufacturers of OTC pain relievers and fever reducers to provide more detailed labeling on products containing acetaminophen and nonsteroidal anti-inflammatory drugs, further action has been taken this May, which requires additional labeling of liquid OTC drug products with dispensing devices. The action aims to ensure consumers are using medications safely and are avoiding incorrect and possibly harmful dosages, especially in children under the age of 2. In addition to increasing the safety of OTCs for young children, this new law will also help restore consumer confidence in OTC products, which has been hurt by the recalls of 2009 and 2010.

The bulk of industry recalls affected industry leader Johnson & Johnson. Several of the company’s major brands across multiple categories, including both adult and children’s medications in the Tylenol, Motrin, Benadryl, and Zyrtec lines, were taken off the market. The problems prompting recalls were varied, ranging from moldy odors to concerns about product safety and manufacturing quality controls. Procter & Gamble, Bayer, and Perrigo have also issued voluntary product recalls on specific lots of their OTC medicines, but not nearly on the same level as the industry’s number one player. With the OTC giant on the sidelines until the first half of 2012, when it is expected to re-enter the market, opportunities have opened for other market players. Chances now exist for them to pick up some of Johnson & Johnson’s lost volume, gain more exposure, and build brand awareness.

The ability of some brands to take advantage of the new openings in the market and post high growth rates has helped offset the market leader’s declines, keeping the market at a constant level. A significant boost to the market also came from the success of some new switch brands, which have seen rapid growth in the market. Sales from Prevacid, Plan B, and allergy medication Claritin helped make up for the large losses. Among the branded marketers, Novartis has been able to take maximum advantage of the 20% slide in Johnson & Johnson’s sales. Novartis managed to boost its sales by over 40% after the successful launch of Prevacid 24 Hour and sales gains for its Excedrin line of pain relievers. The ability to differentiate itself on the quality and safety of its ingredients and the stringency of its safety controls has catapulted it up the top 10 OTC company ladder by three places to hit fourth place in 2010. Before the launch of Prevacid 24 Hour, Novartis ranked seventh in 2009 among the top OTC marketers, and in 2010 the company ranks fourth. Other marketers, including Pfizer, Bayer, and Perrigo, have seen high rates of growth for their brands with the absence of Johnson & Johnson’s brands. This market shake-up comes after several calm years which have seen a stable market division among the top industry players.

Historical growth rates of U.S. nonprescription drugs industry,
2005-2010 average CAGR 2.5%

historical sales OTC

Concern over child safety
One of the key moves behind the success story of Novartis has been its ability to tap into the concerns of worried parents whose confidence was shaken when children’s Tylenol products came under scrutiny. Novartis promptly filled the market gap by launching children’s acetaminophen liquids under its Triaminic brand name. In addition, Novartis is also taking an active part in showing its concern over child safety, taking voluntary steps to give parents and caregivers more accurate and detailed dosing information in regards to infant’s and children’s medications. The focus on making changes that will make the formulas safer and easier to use comes as a reaction to growing FDA concerns over drug safety, particularly where possible over-doses are a concern.

The promotion of drug safety will be crucial for all marketers of branded OTCs over the coming months. The shaken reputation of several branded OTCs lends greater appeal to private-label or store brands. Total private-label sales have already increased at nearly quadruple the rate of the overall U.S. nonprescription drug industry in 2010, seeing sales gains in all product categories. Now accounting for 24.2% of the overall OTC market, private-label OTCs have benefitted from some of the major brands being off the market. The absence of key marketers has left retailers with empty shelf space, allowing private labels to swoop in and take advantage of the unoccupied retail space ”lime light.”

Private labels gain
Private-label manufacturers continue to have a major impact on the competitive landscape of the OTC market. In particular, some have been growing through brand acquisitions and strategic partnership formations. Private-label manufacturers have been able to pave a path to success by offering quality products at lower price points. They have also significantly benefited from their ability to capture the hoards of confused customers searching for medication alternatives to OTC products which have been recalled. The economic recession has also raised awareness of private-labels among cash-strapped consumers. Rather than substituting recalled products for other branded OTCs, many customers have turned to store brands instead. The endorsement of private labels by physicians, coupled with private labels’ competitive pricing and retailers’ aggressive promotions leads to even greater sales gains of private-label OTCs than we have seen in past years. From 2009 to 2010, while the overall market posted flat performance with 0.3% growth, private-label OTCs grew by 9.4%. Private labels are featured by retailers who benefit from the higher profit margins that these products earn in comparison to their branded counterparts. In practice, this means more shelf space allocation and many features on end-of-aisle displays for private labels.

Some marketers are already using Johnson & Johnson’s recalls as an opportunity to run media and advertising campaigns to differentiate their OTC brands. For example, Walgreen’s has run advertisements pointing out the fact that their store brand OTCs are FDA approved and made with strict quality standards. This marks a turning point in the advertising behavior in the market, as private labels have previously not typically been advertised at all. In comparison, Johnson & Johnson, who spent a total of $340 million promoting its Tylenol line over a two year period between 2008 and 2009 has seen their efforts wasted in light of their nearly two year withdrawal from store shelves.

Natural trend seeps in
Natural OTCs are a product group that consumers feel they can trust because they offer safe, drug-free treatment alternatives. Natural OTCs are used to treat and/or prevent ailments typically treated with traditional OTCs. These products may contain natural-, plant-, or herb-based ingredients or vitamins and minerals and can be homeopathic. Their use extends to ailments including the common cold, coughs, pain or digestive problems.

The natural trend, which has been dominating the U.S. personal care industry, has also set roots in the pharmaceutical market, as customers gravitate towards natural products across the board. Eating healthy and a green lifestyle tie in with the interest of U.S. consumers in self care. However, price and efficacy are still key for price conscious customers and their perception of OTC product effectiveness plays a principal role in their sales. Therefore, consumers’ perceptions of the efficacy of natural OTCs is key. Forty-seven percent of U.S. customers have been found to believe that natural OTCs are as effective as traditional OTCs, according to a recent survey carried out by Kline.

Natural OTCs have taken a cut of the shelf space opened up by the evicted OTC recalls. However, exposure alone is not what is driving consumer interest. One of the other crucial findings that comes from customer surveys is that, to a certain extent, natural OTCs do not face direct competition from traditional OTCs. More than half of the respondents indicate they use natural OTCs in addition to traditional OTCs when they are sick. Another 43% indicate they use them for preventive purposes. Therefore, natural OTCs are used to maintain health and wellbeing before customers even have to reach for the help of traditional OTCs, and even when they do, they continue to use natural OTCs in conjunction with OTC drugs to treat their sicknesses.

The outlook for naturals
The wave of consumer awareness about drug safety seems to have strengthened the position of naturals on the market. Research has shown that nearly 40% of consumers are now using natural OTCs more today than a year ago. Even more importantly, natural OTCs are faring well when it comes to consumer satisfaction. Forty-four percent of customers who participated in Kline’s survey indicated they are equally satisfied with natural OTCs, and 22% prefer them to regular OTCs altogether. These numbers all point out the potential that the natural OTC market niche holds.

Reasons for use of Natural OTCs?

natural otc use

Some producers of traditional over-the-counter medications have already made steps to expand their product offerings to include natural OTCs. Prestige Brands has recently launched several line extensions to its Little Remedies line of children’s OTCs. The brand features both non-medicated and appropriately medicated products that follow the philosophy of "less is more." The company has made it their mission to provide medication that contains ingredients necessary for effective relief, but nothing more, eliminating ingredients including saccharin, alcohol, artificial flavors and colorings and preservatives, all of which have received bad press in the wave of natural and green product awareness. If the brand does well, we can expect more marketers to follow and come out with similar lines of their own.

Switches large in size, small in number
Over the next few years, however, the main driver of sales in the U.S. OTC market will continue to be Rx-to-OTC switches. Although the future number of switches will be lower than in past years, they will continue to bring Rx users into the OTC market and expand the current product offering. At the same time, OTC players are seeking more switches overseas where the opportunities for switch approvals and sales growth appear to be more abundant. This is because in most countries outside of the United States, there is a formal behind-the-counter class of medications, which do not require a prescription, but have to be distributed by a pharmacist. Kline will be exploring this growing trend in its upcoming Global Rx-to-OTC Switch 2012: Forecasts and Opportunities.

Interestingly enough, the move of marketers from the U.S. market across the ocean will be met to a certain extent by an influx of some new European OTC brands coming to America. For example, Boiron – French-based manufacturer of homeopathic products – has entered the U.S. market. While it has always performed well in Europe, it is now seeing considerable popularity among American consumers too. The company has benefited from the popularity of the naturals trend. The premise that homeopathics work naturally with the body resonates well with consumers. Kline’s upcoming new report Natural OTCs 2011: Impact of Non-drug Products on the U.S. OTC Market will provide a comprehensive market assessment of non-drug products that compete with traditional OTCs in the U.S. market, including a profile of Boiron and other natural marketers.

The U.S. market for nonprescription drugs will see a dip in sales in 2011, primarily due to the absence of Johnson & Johnson’s brands from the market. With their reintroduction in 2012, however, the market will return on a growth track, expecting to reach an average annual growth rate of 3% through 2015. Additionally, sales will also be driven by recently switched Rx-to-OTC brands. Johnson & Johnson will see gradual recovery from the market entry of its previously recalled brands, but is unlikely to reach previous sales levels until 2015. Certainly, Johnson & Johnson will have a long way to go in earning back consumers’ trust.


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