The over-the-counter drug market is heating up as consumers turn increasingly toward self-medication in an effort to minimize out-of-pocket healthcare costs. With increasing competition from private-label products, blockbuster switches, and somewhat unconventional entries into the OTC drug business, new data reveals that while innovation doesn’t necessarily equate to superb business performance, there is plenty of room for players of all sizes and shapes in the nonprescription drugs market.
Still facing a formidable challenge from private-label suppliers, a number of OTC companies have fired up their R&D engines and ramped up Rx-to-OTC switch activity to better compete for their share of the market. The shift in consumers' desire to self-treat—partly out of convenience, partly for the cost savings—has even attracted a few “unconventional” newcomers to the OTC table, hoping to grab their own piece of the pie.
Amid this flurry of activity, the latest industry data reveals that while innovation is definitely a key driver in OTC success, it’s not always a certain path to stellar profitability. In this issue, we’ll take a look at some of the most active players in the industry and examine how each has leveraged its strengths to achieve success, demonstrating that there is no one-size-fits-all winning formula in the OTC market.
Making the “Switch” to OTC
In a textbook example of coming “out of the shadows” to make a huge splash, Reckitt Benckiser emerged as the fastest-growing OTC company for 2009. Well-known in the United States for its powerhouse cleaning brands like Lysol disinfectant, Airwick air fresheners, Woolite laundry detergent, Finish dishwashing detergent, and even Clearsil skin care, the company joined the OTC ranks by adding Mucinex and Delsym brands of cold medications and cough syrups with its purchase of Adams Respiratory Therapeutics in January 2008. The acquisition propelled sales growth at Reckitt Benckiser up 8.7% in 2009 with a compound annual growth rate (CAGR) of 24.2% over the last five years. The company’s two OTC brands also scored high marks for innovation in Kline’s OTC Innovations USA 1999-2009:
Analysis of Factors for Success study.
However, Kline’s OTC Drugs: U.S. Competitor Cost Structures study pegs Reckitt Benckiser’s OTC unit’s profitability as one of the lowest in the industry after the company spent huge dollars on marketing and advertising—nearly 60% of sales are spent on promotion for Mucinex and Delsym. As an industry newcomer, Reckitt Benckiser is still very much a niche player and will soon face private-label competition for its Mucinex brand. In order to maintain its admirable growth trend, Reckitt Benckiser must muster its strength in innovation and/or diversification to keep these factors from being a wet blanket to its white-hot growth.
On the other hand, profitability doesn’t necessarily drive innovation either. Fellow newcomer to the OTC market Sanofi-Aventis also took the acquisition route with its purchase of Chattem primarily to leverage growth from the anticipated Rx-to-OTC switch of Allegra allergy medication. Despite being found among the most profitable OTC makers, neither Sanofi-Aventis nor Chattem were found to be particularly innovative, demonstrating that the OTC business is profitable and well-managed while not necessarily offering products on the cutting edge. However, the future switches of Allegra and the more long-term switch candidate, Xyzal allergy medicine, will help improve innovation scores for Sanofi-Aventis.
Slow but Steady Growth Built on Innovative Reputation
Coming in at second place on the growth scale, industry stalwart Novartis posted a 6.0% uptick in sales for 2009. However, with a CAGR at just 0.5% over the past five years, the company best known for its Theraflu, Excedrin, and Prevacid 24 Hour brands at first seems barely lukewarm compared to the double-digit growth at Reckitt Benckiser. Actually, Novartis’ OTC unit is found to be more profitable and also earned high marks as one of the most innovative on the market, with eight of its brands ranking well on the Innovation Index, including Benefiber, Extra Strength Excedrin, Desenex, Gas-X, Lamisil AT, Theraflu, Triaminic, and Zaditor eye drops. Its recent switch of Prevacid 24 Hour has no doubt introduced this product to a whole new audience, which will continue to foster some growth, but with little else in the switch pipeline, Novartis will likely be looking for its next big breakthrough.
In another example of harnessing a switch to yield slow-but-steady results, Merck not only posted a healthy operating margin in the first half of 2010, but it also scored well on the Innovation Index for its Claritin, Miralax, Coricidin HBP, and Afrin brands. With sales up 1.2% in 2009 and a 3.3% CAGR over the last five years, the company also stands to gain share in the digestive category with the recent Rx-to-OTC switch of Zegerid OTC. A possible Clarinex switch could also help the company build momentum in both profitability and innovation.
Big Brands, Great Expectations
Banking on the potential of three anticipated blockbuster switches, it appears that Pfizer could use a boost from both the sales and innovation prospective. Despite a healthy operating margin in first half of 2010, OTC sales at Pfizer fell 0.5% over the last year, and its five-year CAGR is also down 0.4%. Only three Pfizer brands made it onto the Innovation Index: Advil, Thermacare, and Preparation H wipes.
With its Wyeth acquisition, Pfizer will stay in the OTC business, no doubt hoping the anticipated switches of Lipitor, Detrol, and Protonix will provide the boost in sales and perceived innovation to jumpstart growth.
In a classic case of irony, consumer products juggernaut Procter & Gamble posted a very high operating margin in the first half of 2010, even while sales were down 2.8% in 2009, thanks to heavy private-label competition for its Prilosec OTC. Also somewhat contrary to convention, the company ranked high on the Innovation Index, but with just its Prilosec OTC brand considered innovative. With not much in the switch pipeline, Procter & Gamble will likely be looking at acquisitions and licensing deals to build momentum and climb out of its dwindling OTC sales trend.
Plagued by a recent rash of OTC product recalls that have no doubt tarnished Johnson & Johnson’s legendary reputation for quality and trust, the nation’s largest OTC company still maintains the top spot with the highest number of innovative brands in a wide range of categories, from analgesics to diabetes care. Familiar brands making the list include its Tylenol Rapid Release Gels, extensions in the KY personal lubricants line, Benadryl, Monistat 1, Neosporin, One Touch Ultra, Pepcid AC, Sudafed, Viactiv, and Zyrtec.
As 2011 plays out, we will see how Johnson & Johnson handles the re-launch of many of its brands that have been off retail shelves for the past year or more. After Congressional hearings and many FDA inquiries, meetings, and inspections, the company has a uphill battle to regain its lost market share, sales and reputation. With two potential switch candidates in the pipeline—Ditropan and Aciphex—the healthcare and pharmaceuticals behemoth is gearing up for a rebound to solidify its sales and reputation.
The Triple Crown Threat
As diversified companies in a wide range of categories place more value on their OTC units in an effort to build momentum, it appears that no singular strategy is the key to success in this highly competitive market. For some, niche marketing may be the key to driving strong growth, while others may find success with a diversified approach built upon a portfolio of line extensions and switch products. One thing remains clear: success in the OTC market requires that brands strike a careful balance between a strong focus on innovation, a keen eye on controlling costs and a healthy portfolio of potential Rx-to-OTC switches in the pipeline—a triple crown that private-label makers have little mechanism to duplicate.
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