Big Pharma Considers Kicking the OTC Habit

12/18/07 - 06:14 AM EST

BMY GSK JNJ MRK PFE SGP (Action Alerts PLUS PICK) WYE

When they issue an annual report to stockholders or a quarterly report to Wall Street, Big Pharma companies place their prominent prescription products and the promising aspects of their pipelines front and center.

However, when investors and analysts read further down the list of accomplishments, they find that over-the-counter drugs, nutritional products and items ranging from mouthwash to sunscreen provide consistent, even if less spectacular, financial support.

For many big drugmakers, these lower-margin goods provide more than 10% of sales, but not every company is inclined to keep them around. Pfizer (PFE - Cramer's Take - Stockpickr) exited this field 12 months ago, selling its business to Johnson & Johnson (JNJ - Cramer's Take - Stockpickr) for $16.6 billion. Pfizer is using the money to focus on prescription drugs.

Bristol-Myers Squibb (BMY - Cramer's Take - Stockpickr) is contemplating getting rid of all businesses unrelated to prescription drugs. It sold its over-the-counter operations and also plans to sell its medical-imaging business to a private equity firm for $525 million. Bristol said it was exploring options for its infants-and-children nutrition business and its wound-care unit.

Other drug giants such as Johnson & Johnson and GlaxoSmithKline (GSK - Cramer's Take - Stockpickr) are bulking up on what the industry calls consumer health care products.

This component "is a knife that cuts both ways," says Damien Conover of the independent research firm Morningstar. On the plus side, a consumer-health care division doesn't have to contend with impending patent expirations "so you can smooth out cash flow," he says. However, such a unit "can distract from the strategy of focusing on branded drugs."

For the nine months ended Sept. 30, the biggest consumer-health unit belonged to J&J, with $10.7 billion in sales. Glaxo had $5.3 billion, Bayer produced $4.9 billion, Novartis (NVS - Cramer's Take - Stockpickr) had $4 billion, and Abbott (ABT - Cramer's Take - Stockpickr) had $3.2 billion.