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Big Pharma Considers Kicking the OTC Habit

Several firms are debating whether to bulk up or shed lower-margin units.

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.



exited this field 12 months ago, selling its business to

Johnson & Johnson


for $16.6 billion. Pfizer is using the money to focus on prescription drugs.

Bristol-Myers Squibb


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



are bulking up on what the industry calls consumer health care products.

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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,


produced $4.9 billion,



had $4 billion, and



had $3.2 billion.







also have substantial consumer-health divisions.

After Bristol, the next big drug seller to make a change might be Schering-Plough, whose consumer-health division had $1.12 billion in sales, or 10.6% of last year's total revenue (excluding revenue from a joint venture with



that sells two cholesterol drugs).

When you add the joint venture revenue of $1.9 billion in 2006 to the $4.9 billion in sales for the human and animal drugs gained via the recent purchase of Organon BioSciences from

Akzo Nobel


, the consumer-health care unit's share of Schering-Plough's revenue shrinks to about 6.5%.

The question is, will a $1 billion-plus division be too small for the new Schering-Plough, or would it be better to sell the unit to raise money for prescription-drug R&D?

Among its peers, J&J had the biggest consumer-health unit even before it bought Pfizer's division.

J&J augmented the purchase last month by gaining approval from the Food and Drug Administration to convert Pfizer's prescription antihistamine Zyrtec to an over-the-counter drug. J&J's version goes on sale in January, a month after Zyrtec's U.S. patent expires.

Popular brands like Band-Aids, and now former Pfizer stars like Listerine, can help J&J to create a brand identity for other products, says Conover of Morningstar. He adds that Glaxo uses its over-the-counter drugs to establish a brand identity in many developing nations. "It's something like a stepping stone" for selling prescription products, he says. "It helps them increase market exposure."

In the U.S., Glaxo paid $566 million a year ago to buy CNS, the maker of Breathe Right nasal strips and a dietary supplement. Glaxo also has made deals to market several drugs that developers want to convert from prescription to over-the-counter status.

Earlier this year, Glaxo launched Alli, an over-the-counter version of the prescription weight-loss drug Xenical from


. "Alli has been successful," Conover says. Glaxo recently signed a deal with



to commercialize prescription and over-the-counter heartburn and ulcer drugs in many foreign markets.

Glaxo also wants to sell the prescription cholesterol drug Mevacor as an over-the-counter medication. Glaxo has the U.S. marketing rights from the drug's creator,



. Mevacor has long since lost patent protection.

However, the companies were rebuffed Thursday when a group of medical advisers to the FDA voted 10-2 against switching Mevacor to over-the-counter status. The FDA doesn't have to support advisory panels' opinions, but it usually does. This is the third time Merck has tried to convince the FDA to place Mevacor over the counter.

Switching from prescription to over-the-counter status usually represents the last stage of a drug's development, says Joshua Cohen, senior research fellow at the Tufts Center for the Study of Drug Development. Rather than watch sales be destroyed by generic competition after a patent expiration, some companies seek extra revenue by trying to convince the FDA that consumers don't need a prescription.

Mild pain relievers, antihistamines, antismoking drugs and heartburn treatments are among the most popular switches.

But switches take time, money and marketing skill, investments that some drugmakers don't want to make, says Cohen. And changing a drug's status "is not necessarily a win-win situation for consumers," Cohen adds.

Although they might gain easier access, consumers with health insurance may pay more for an over-the-counter drug than a generic prescription drug because their plans don't cover over-the-counter products.