Market Research: OTC Industry Looks to High-Growth  OTC Switches to Fuel Industry Growth

Amid mounting pressure from generics and private-label products, branded drug manufactures are counting on Rx-to-OTC switches to drive growth and keep revenues flowing. Recent switches have generated $1 billion—about 10% of total industry sales for 2009—making this an attractive path for drug makers. With a number of potentially huge switches on the horizon, the next few years could see a flurry of activity that will drive post-recessionary growth through 2014.

Over the past few years, Rx-to-OTC switch products have emerged as a major growth driver in the U.S. OTC drug industry. While overall industry growth moderated to just 2.2% in 2008-2009, growth for Rx-to-OTC switches shot up by more than 12%. On the heels of numerous successful switches like Prevacid 24 Hour, Zegerid, Alli, and MiraLax, manufacturers have begun looking ahead at potential switch candidates much earlier in the Rx product life cycle. And with good reason: while the OTC market as a whole is expected to gain with just a CAGR of 2.6% over the next five years, future switches are set to explode by nearly 75%, adding more than $1.5 billion in absolute dollars to the OTC market.

Switches deliver higher growth than traditional OTC brands

With so much potential on the line, manufacturers are taking a hard look at what makes for a successful switch candidate and switch process. Adding to the anticipation, a number of industry factors have converged to pave the way for some potentially blockbuster switches that could be on the horizon.

The Switch Dilemma
Faced with impending patent expiration and the potential for huge losses of revenue from generic competition (often 50% or more of revenues are lost to generic copies of branded drugs), brands look at switches as a way to mitigate their losses. In one recent example, Santarus partnered with Schering-Plough (now Merck) to launch a “premature” switch of Zegerid –a relatively small brand—well ahead of patent expiration to try and gain a stronger foothold in the crowded OTC proton pump inhibitor category.

In the wake of generic competition, Rx revenues typically decline 65% to 80%, even up to 90% in some cases. Even in some of the most highly successful switches, the $300 million to $400 million in sales hardly compare to the $3 billion generated under the Rx label. A successful switch can be costly—both in terms of clinical trials and gaining approval and the requisite marketing dollars that must be poured in to promote the product.

The Market Loves Switches
Manufacturers, consumers, managed care providers, and retailers unequivocally love the concept of Rx-to-OTC switches. Despite the costs of a switch, manufacturers relish the prospects for growth they bring, as well as their ability to help buffer the post-patent decline and provide a relatively long-term revenue stream.

Consumers enjoy the convenience and savings of purchasing their medications without a prescription, and Rx-to-OTC switches enable them to self-treat for embarrassing conditions they may feel uncomfortable discussing with a doctor. Because of the demand for access to affordable medications, managed care providers have a vested interest in supporting switches as well, which can significantly alleviate their coverage burden without depriving patients of their needed medications.

Retailers also reap the benefits of Rx-to-OTC switch campaigns. Boosted by strong marketing and promotional campaigns from the manufacturer, switches pique customers’ interest and bring them into the store. This increased foot traffic is a boon to both small and large retailers that can use the promos to entice shoppers with other products. Cooperative promotional packages developed jointly by the retailers and manufacturers can also help to improve this vital relationship, which ultimately benefits not only them, but the customer as well.

Behind-the-counter Losing its Stigma
Once considered a no-man’s land, the behind-the-counter (BTC) class has emerged as a much more promising option for bridging the Rx-to-OTC barrier than it once had been. Still regulated at the state and local level, BTC drugs require some interaction with the pharmacist or pharmacy technician, but maintain the convenience and savings factor of the OTC model.

The FDA mandate to move all cold and sinus medications containing pseudoephedrine behind the counter to control their use in the illegal drug trade shined new light on this class and helped to quell manufacturers’ fears of failure. More recently, the Plan B emergency contraception drug—arguably one of the most successful BTC launches in history—has bolstered the validity of the BTC model. This $100 million brand has demonstrated that BTC doesn’t necessarily have to mean “out of sight, out of mind” for consumers.

The BTC class provides an interesting opportunity for drug makers to pursue more complex switches. Certainly the interaction required with the pharmacist may help to reassure the FDA that patients’ questions will be adequately addressed.

Despite the added workload of patient counseling—and the related issue of liability—pharmacists as a whole are in favor of the BTC class and wider adoption of the Rx-to-BTC strategy. The American Pharmacists Association has endorsed the model citing the opportunity to establish better patient interaction and stronger relationships with customers as key benefits. With a growing number of pharmacies adding retail health clinics into their facilities, the BTC class fits well into this model. Bolstered by strong marketing and patient education support from the brands, Rx-to-BTC switches could generate a very loyal following by leveraging the existing Rx customer base alongside the pharmacist’s recommendations.

International Precedents
The emerging availability of several Rx-to-OTC/BTC drugs outside the United States is also providing a strong precedent for the safe and effective nonprescription use of products that could pave the way for a switch here in the United States.

In February 2009, the European Medicines Agency approved the marketing of Protonix for the short-term treatment of reflux symptoms in adults without a prescription. The decision, which applies to all 27 countries in the European Union, paved the way for Nycomed GmbH to launch the product this year. In the United Kingdom, Flomax Relief has already been approved for sale in the Pharmacy Class (equivalent to BTC here in the United States) for the treatment of enlarged prostate (BPH) in men. The migraine medicine Imitrex launched BTC in the United Kingdom at the same 50 mg dosage as the prescription tablets.

So far, the use of BTC products has generally proven to be safe and effective, with no significant reports of adverse reactions. This safety and efficacy overseas could encourage the FDA to look more favorably on these same drugs for OTC consideration here in the United States.

The Switch Outlook
With the successful Rx-to-BTC switch of Merck’s statin drug Zocor Heart Pro in the United Kingdom, all eyes in the United States have turned to Lipitor as a hot potential switch candidate. This blockbuster cholesterol drug goes off patent next year amid speculation about its switch potential.  

The biggest challenge facing Pfizer is the asymptomatic condition and blood testing required for the effective treatment of high cholesterol. While the company hasn’t been outwardly vocal about its plans to push for a switch, if it were to do so, the resulting product—likely a BTC switch—would have to be a low-dose with very specific claims and warnings backed by substantial educational resources for both patients and pharmacists. A creative bundling of a home blood test kit could even provide the complete package needed to reassure the FDA, patients, and pharmacists of the safety and efficacy of a nonprescription version of Lipitor.  

Also potentially on the horizon, a slate of urinary incontinence medications are set to go off patent in the next few years, including Detrol and Oxytrol, while Ditropan and Enablex have already lost patent protection. These join the already expired list of BPH medicines like Cardura, Flomax, and Hytrin. With symptoms and treatment efficacy much more overt with these conditions, forthcoming switches in these categories are anticipated over the next few years. 

Leveraging a Switch to Boost other Brands
With R&D and ad spending by the OTC branded manufacturers generally in decline due to the soured economy, private-label OTC products have surged. While this trend will likely level off, growing evidence indicates that consumers’ frugality and comfort level with private-label products provides little incentive to switch back to the higher-priced brands. In the wake of the Tylenol infant’s and children’s formula recalls, brand safety has even been called into question. Add to this the pervasiveness of pseudo-branded private-label products, such as Wal-Mart’s Equate and Costco’s Kirkland lines, and it becomes abundantly clear that the brands could use a shot in the arm.

The potential for a large cash infusion from an initial Rx-to-OTC switch could provide just what the doctor ordered. Lackluster product innovation could be substantially offset by reinvesting switch capital into reformulations, line extensions, repackaging, new flavors or delivery systems, or a general refresh of existing brands. Private-label competition is a huge threat in mature categories, and branded marketers could leverage the switch capital infusion to boost older brands against the private-label groundswell.